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Before the
Federal Communications Commission
Washington, D.C. 20554
In re Application of )
)
GTE CORPORATION, )
Transferor, )
)
and )
) CC Docket No. 98-184
BELL ATLANTIC CORPORATION, )
Transferee )
)
For Consent to Transfer Control of Domestic )
and International Sections 214 and 310 )
Authorizations and Application to Transfer )
Control of a Submarine Cable Landing License )
)
MEMORANDUM OPINION AND ORDER
Adopted: June 16, 2000 Released: June 16, 2000
By the Commission: Commissioners Ness and Tristani issuing separate statements;
Commissioners Furchtgott-Roth and Powell concurring in part, dissenting in part, and issuing
separate statements.
TABLE OF CONTENTS
Paragraph
I. INTRODUCTION. . . . . . 1
II. EXECUTIVE SUMMARY . . . . . .5
III. BACKGROUND. . . . . . . 6
A. The Applicants . . . . . . . 6
B. The Merger Transaction . . . . . 10
C. The Merger Review Process. . . . . . .11
1. Department of Justice Review. . . . . . .11
2. State Review. . . . . . . 12
3. Commission Review . . . . . . .12
IV. PUBLIC INTEREST FRAMEWORK . . . . . . 20
V. COMPLIANCE WITH SECTION 271 . . . . . 26
A. Applicants' Spin-off Proposal. . . . . . . 29
B. Discussion . . . . . . 39
1. Ownership . . . . . .41
2. Analysis of the Applicants' Spin-off Proposal . . . . . 59
3. Control . . . . . . .76
4. Other Issues. . . . . . . 92
VI. ANALYSIS OF POTENTIAL PUBLIC INTEREST HARMS . . . . .96
A. Overview . . . . .96
B. Loss of Competition Between Bell Atlantic and GTE in the Local Market. . . . . . . 97
1. Background. . . . . .97
2. Discussion. . . . . 100
3. Relevant Markets. . . . . . . 101
C. Comparative Practices Analysis . . . . . .127
1.Need for Comparative Practices Analyses. . . . . .132
2.Effect of Reduction in Number of Benchmarks. . . . . . 134
3.Adverse Effects of Bell Atlantic/GTE Merger. . . . . . 143
4.Continued Need for Major Incumbent LEC Benchmarks. . . . . .152
5.Conclusion . . . . .171
D. Increased Discrimination . . . . . . 173
1. Overview. . . . . . 173
2. Analysis. . . . . . 179
VII. ANALYSIS OF PUBLIC INTEREST BENEFITS. . . . . .209
A. Background . . . . . .209
B. Internet Backbone Services . . . . . 214
C. Local Exchange and Bundled Services. . . . . . 218
1. Entry into Out-of-Region Local Exchange Markets . . . . . . 220
2. Provision of Nationwide Bundled Services. . . . . 226
D. Long Distance Services . . . . .232
E. Wireless Services. . . . . 235
F. Efficiencies . . . . .239
G. Conclusion . . . . . .245
VIII. CONDITIONS. . . . . . 248
A. Adopted Conditions . . . . . . .248
1. Promoting Equitable and Efficient Advanced Services Deployment. . . . . . .260
2. Ensuring Open Local Markets . . . . . . 279
3. Fostering Out-of-Territory Competition. . . . . . 319
4. Improving Residential Phone Service . . . . .324
5. Ensuring Compliance with and Enforcement of these Conditions. . . . . 332
B. Benefits of Conditions . . . . .349
1. Mitigating Harm from Loss of Potential Competition. . . . . 350
2. Mitigating Harm from Loss of Benchmarks . . . . . 353
3. Mitigating Harm from Potential Increased Discrimination . . . . .359
4. Additional Benefits from Conditions . . . . .366
C. Other Requested Conditions or Modifications to Proffered Conditions. . . . . . . .373
IX. MOBILE COMMUNICATIONS SERVICES. . . . . . 376
A. Licenses and Service Offerings . . . . . .378
B. Analysis of Potential Competitive Harms. . . . . . .380
1. Overlapping Ownership Interests . . . . . . .380
2. Revised Consent Decree. . . . . . .383
3. Compliance with CMRS Ownership Rules. . . . . . . 385
4. Other Competitive Issues. . . . . .390
C. Conclusion . . . . . .393
X. INTERNATIONAL ISSUES. . . . . . 394
A. General. . . . . 394
B. Foreign Affiliation. . . . . . .400
1. Standards . . . . . 402
2. Specific Affiliations . . . . . . .406
3. Cable Landing Licenses. . . . . . .423
XI. OTHER ISSUES. . . . . 427
A. Service Quality Issues . . . . .427
B. Character Issues . . . . . 429
C. Requests for Evidentiary Hearing . . . . .434
XII. ORDERING CLAUSES. . . . . .439
APPENDIX A: List of Commenters
APPENDIX B: Genuity Conditions
APPENDIX C: Summary of Confidential Information
[TEXT NOT AVAILABLE IN PUBLICLY RELEASED VERSIONS]
APPENDIX D: Market-Opening Conditions
APPENDIX E: GTE April 17, 2000 Ex Parte Letter
APPENDIX F: GTE April 28, 2000 Ex Parte Letter
I. INTRODUCTION
1. In this Memorandum Opinion and Order, we consider the joint applications of Bell
Atlantic Corporation (Bell Atlantic) and GTE Corporation (GTE) (collectively, Applicants)
pursuant to sections 214(a) and 310(d) of the Communications Act of 1934, as amended
(Communications Act or Act), for approval to transfer control of licenses and lines from GTE to
Bell Atlantic in connection with their proposed merger. In order to persuade us to grant their
applications, Bell Atlantic and GTE must demonstrate that their proposed transaction will serve
the public interest, convenience, and necessity. As described in more detail below, Bell Atlantic
and GTE supplemented their original applications with an additional filing that included proposed
merger conditions to which both parties voluntarily committed. In addition, the Applicants
submitted a proposal to transfer the Internet and related assets of GTE Internetworking, Inc., now
known as Genuity, Inc. (Genuity), to an independently owned public corporation so that
consummation of the merger would not instantly result in a violation of section 271 of the
Telecommunications Act of 1996.
2. We first conclude that the Applicants' proposal to spinoff GTE's Internet backbone
and related assets into a separate public corporation is sufficient to demonstrate that completion
of the merger would not result in a violation of section 271. Under the transaction we approve
herein and that the Applicants must complete prior to merger closing, the Applicants will retain
shares that represent less than 10 percent of the spun-off entity and that contain a conditional
conversion right. Applying a three-part test, we conclude that the merged firm will not own an
equity interest or the equivalent thereof of more than 10 percent of Genuity. We further find that
the merged firm will not control Genuity, nor will it be providing interLATA services through its
post-spin-off relationship with Genuity.
3. In addition, we find in this Order that, absent conditions, the merger of Bell Atlantic
and GTE will harm consumers of telecommunications services by (a) denying them the benefits of
future probable competition between the merging firms; (b) undermining the ability of regulators
and competitors to implement the pro-competitive, deregulatory framework for local
telecommunications that was adopted by Congress in the 1996 Act; and (c) increasing the merged
entity's incentives and ability to discriminate against entrants into the local markets of the merging
firms. Moreover, we also find that the asserted public interest benefits of the proposed merger
will not outweigh these public interest harms.
4. The Applicants, however, have proposed conditions that will alter the public interest
balance. These conditions are designed to mitigate the potential public interest harms of the
Applicants' transaction, enhance competition in the local exchange and exchange access markets
in which Bell Atlantic or GTE is the incumbent local exchange carrier (incumbent LEC), and
strengthen the merged firm's incentives to expand competition outside of its territories. We
believe that the voluntary merger conditions proposed by the Applicants and adopted in this Order
will not only substantially mitigate the potential public interest harms of the merger, but also
provide public interest benefits that extend beyond those resulting from the proposed transaction.
Accordingly, we conclude that approval of the applications to transfer control of Commission
licenses and lines from GTE to Bell Atlantic serves the public interest, convenience, and necessity
and, therefore, satisfies sections 214 and 310(d) of the Communications Act given these
significant and enforceable conditions.
V. EXECUTIVE SUMMARY
6. The applications before us concern the proposed merger of one of four remaining
Regional Bell Operating Companies (RBOCs) and an incumbent LEC of a size comparable to that
of an RBOC. We conclude that, with the conditions adopted in this Order, the Applicants have
demonstrated that the proposed transfer of licenses and lines from GTE to Bell Atlantic will serve
the public interest. We also make the following determinations in support of this conclusion:
· Compliance with Section 271. Because GTE will transfer its Internet backbone
and related assets to a separate public corporation (Genuity) prior to merger closing,
the proposed transaction will not result in a violation of section 271 of the Act. The
merged firm will retain shares of Genuity stock that will comprise less than 10 percent
of Genuity's voting, dividend and distribution rights. These Class B shares will
contain a contingent right that enables the merged firm to convert the shares into
additional shares of up to 80 percent of Genuity only if it obtains section 271 authority
with respect to 95 percent of Bell Atlantic's in-region access lines within five years of
the merger's closing. We conclude that this conditional conversion right is not an
equity interest or its equivalent within the meaning of the Act, for the following
reasons:
1) The exercise of the conversion right is genuinely in question. The merged firm will
be able to exercise its conversion right only if it obtains section 271 authority with
respect to 95 percent of Bell Atlantic's in-region access lines within five years. It
also must be in a position to operate Genuity's business consistent with section
271 in all Bell Atlantic in-region states prior to actual conversion. If the merged
entity seeks to sell its conversion right prior to satisfying this 95-percent threshold,
it must first offer to sell those shares to Genuity in exchange for a debt instrument
in an amount equal to its initial investment plus a rate of return based on the
Standard & Poor's 500 Index or the fair market value of the shares, whichever is
less. If Genuity declines, the merged firm will transfer the shares to a liquidating
trustee for disposition, and the merged firm would receive limited sales proceeds
that would not exceed the value of its initial investment plus a rate of return based
on the Standard & Poor's 500 Index.
2) The interest furthers the purposes of section 271 by increasing the merged firm's
incentive to achieve section 271 compliance quickly throughout the Bell Atlantic
region. This is reinforced by the requirement that the merged firm forgo ratably
any appreciation that is attributable to the period of time prior to section 271
authorization in any state.
3) The interest will not increase the likelihood that the merged firm will discriminate
against Genuity's rivals because any discriminatory behavior would be readily
detectable, either by an independent auditor or through the section 271 approval
process, and may result in appropriate enforcement action.
· Potential Public Interest Harms. The proposed merger of this RBOC and major
incumbent LEC threatens to harm consumers of telecommunications services in three
ways.
1) The merger will remove GTE as one of the most significant potential participants
in the local telecommunications mass markets within Bell Atlantic's region, thus
substantially reducing the prospect of competition in those markets, which
Congress has determined will serve the public interest.
2) The merger will reduce the Commission's ability to implement the market-opening
requirements of the 1996 Act through comparative practice oversight
(benchmarking) methods. Contrary to the deregulatory, competitive purpose of the
1996 Act, this will increase the duration of the entrenched firms' market power
and raise the costs of regulating them and make it more difficult for the
Commission to achieve the Act's deregulatory objective.
3) The merger will increase the incentive and ability of the merged entity to
discriminate against its rivals, particularly with respect to the provision of
advanced telecommunications services, a result that is likely to frustrate the
Commission's ability to foster advanced services as it is directed to do by the 1996
Act.
· Potential Public Interest Benefits. The asserted benefits of the proposed merger
do not outweigh the significant harms detailed above.
1) The Applicants have not met their burden of demonstrating that the proposed
merger will produce a public interest benefit by promoting competition in the
provision of Internet backbone services because (a) the ultimate recombination of
GTE's Internet data business with Bell Atlantic's local customers is entirely
speculative and (b) the Applicants have not demonstrated that such combination
will result in a benefit to the Internet and data services market.
2) The Applicants have failed to demonstrate that the merger is necessary to obtain
the benefits to local competition of its out-of-region expansion plan, in which the
merged firm will enter twenty-one out-of-region local markets as a competitive
LEC.
3) The Applicants have not demonstrated with any specificity that their merger is
likely to produce public interest benefits in the long distance market.
4) The proposed merger produces some public interest benefits to the market for
wireless communications. The recently completed merger of Bell Atlantic and
Vodafone created a carrier with a substantial wireless footprint, and the addition
of GTE's wireless markets to this footprint will afford consumers in these markets
the option of selecting Bell Atlantic/Vodafone services.
5) A small portion of the Applicants' claimed cost-saving efficiencies, including
consolidation efficiencies, implementation of best practices, faster and broader
roll-out of new services, and benefits to employees and communities, are merger-
specific, likely, and verifiable.
· Conditions. On January 27, 2000, the Applicants supplemented their initial
application by submitting a set of voluntary commitments as conditions of approval of
their proposed transfer of licenses and lines. Following a period of public comment
regarding their proposed conditions, the Applicants revised their commitments on
April 14, 2000, April 28, 2000, and May 19, 2000. Assuming the merged firm's
satisfactory compliance with their proposals, implementation of the conditions adopted
herein will further the following goals:
1) promote advanced services deployment;
2) enhance the openness of in-region local telecommunications markets;
3) foster out-of-region local competition;
4) improve residential phone service; and
5) enforce the Merger Order.
These commitments are sufficient to alter the public interest balance such that the
application to transfer licenses and lines is, overall, in the public interest and should be
approved.
· Wireless. Bell Atlantic and GTE are required by the U.S. Department of Justice
(DOJ) and as a condition of this Order to divest one of the cellular telephone licenses
in ninety-six Metropolitan Statistical Areas and Rural Service Areas where the two
companies have wireless licenses that overlap geographically.
· International. The public interest will be served by transferring control of GTE's
international section 214 authorizations and submarine cable landing licenses (other
than those being transferred to Genuity).to Bell Atlantic, subject to the condition that
the merged firm's subsidiaries be classified as dominant international carriers in their
provision of service on the U.S.-Gibraltar, U.S.-Dominican Republic, and U.S.-
Venezuela routes.
III. BACKGROUND
A. The Applicants
4. GTE Corporation. GTE is the nation's largest independent incumbent LEC, providing
local exchange and exchange access services in twenty-eight states, with service to more than 26
million access lines. In 1999, GTE's operating revenues exceeded $25 billion. Not one of the
original RBOCs created during the dismantling of the Bell System, GTE was created from the
combination of smaller telephone companies. After its initial formation in 1918, GTE evolved
and grew as a result of a series of acquisitions of telephone companies, including Peninsular
Telephone, Hawaiian Telephone, and Northern Ohio Telephone. In 1990, GTE merged with
Contel Corporation, and in 1999, GTE acquired a 40 percent ownership interest in the Puerto
Rico Telephone Company.
5. In addition to providing local exchange and exchange access services, GTE provides
wireless, Internet access, and directory publishing services. Not subject to the interLATA
restrictions governing BOCs, GTE entered the long distance market in 1997 through a long-term
agreement with LDDS WorldCom. GTE also has significant investments in communications
and information services business in Canada, the Dominican Republic, Venezuela, Argentina,
Micronesia, and China.
6. In 1997, GTE acquired BBN, a company involved in Internet activities, and purchased
fiber-optic capacity from Qwest to develop internetworking capabilities. BBN, which evolved
into GTE Internetworking and is now known as Genuity, operates a national Internet backbone
network and provides a host of Internet-related services including dedicated and dial-up Internet
access and Web hosting and security services.
7. GTE holds numerous Commission licenses and operates lines used in interstate and
international communications, including domestic and international lines authorized under section
214, and various Title III licenses necessary to operate cellular, paging, PCS, experimental radio,
business radio, mobile radio, and microwave services, as well as earth station authorizations.
8. Bell Atlantic. Bell Atlantic, one of the original seven regional Bell Operating
Companies formed as part of the divestiture of AT&T's local operations, is the primary incumbent
LEC in thirteen states in the mid-Atlantic and northeastern United States, in addition to the
District of Columbia. Through its operating companies, Bell Atlantic services more than 43
million local exchange access lines and had 1999 operating revenues in excess of $33 billion. In
1997, Bell Atlantic acquired NYNEX Corporation, which had been the incumbent provider of
local exchange and exchange access services in the states of the northeastern United States,
extending its in-region incumbent LEC activities substantially.
9. In addition to local exchange and exchange access services, Bell Atlantic's operating
companies provide a wide range of other services, including cellular, personal communications
services (PCS), paging, Internet access, and directory publishing services. Bell Atlantic's
wireless operations include service provided throughout the United States as well as investments
in Latin America, Europe, and the Pacific Rim. In 1999, Bell Atlantic's wireless companies
provided service to more than 27 million subscribers. Bell Atlantic also has many overseas
investments, including direct or indirect financial interests in communications and information
services businesses in New Zealand, Mexico, Italy, Indonesia, Thailand, Gibraltar, the Philippines,
the United Kingdom, Greece, Slovakia, and the Czech Republic.
10. On March 30, 2000, the Wireless Telecommunications and International Bureaus,
acting upon delegated authority, granted approval of Bell Atlantic and Vodafone AirTouch, PLC
(Vodafone), a U.K. corporation, to transfer control of their U.S. wireless licenses and
authorizations to Cellco Partnership (Cellco). In doing so, the Bureaus concluded that the
transaction would not present competitive concerns, but rather, would likely result in a number of
public interest benefits. Cellco is the vehicle through which Bell Atlantic and Vodafone formed a
domestic, nationwide wireless business that combines their cellular, PCS, paging, and other
wireless properties in the United States.
A. The Merger Transaction
11. Proposed Transaction. On July 28, 1998, Bell Atlantic and GTE announced their
Agreement and Plan of Merger (Merger Agreement), under which a wholly-owned subsidiary of
Bell Atlantic would merge with GTE, and GTE would be the surviving corporation and would
itself become a wholly-owned subsidiary of Bell Atlantic. GTE would therefore survive as a
wholly-owned subsidiary of Bell Atlantic, and the GTE subsidiaries holding section 214
authorizations, submarine cable landing licenses, or radio licenses would survive as wholly-owned
subsidiaries of GTE. Following the merger, approximately 57 percent of the shares of Bell
Atlantic would be held by the current shareholders, and approximately 43 percent of the shares of
Bell Atlantic would be held by the shareholders of GTE. The board of directors of the merged
firm would be comprised of an equal number of members from Bell Atlantic's board and GTE's
board.
12. Together, Bell Atlantic and GTE would serve more than 69 million local access lines,
representing more than one third of the nation's total access lines. As determined from the
December 1999 statistics of both companies, the merged entity would have annual revenues in
excess of $58 billion. Accordingly, as measured by revenues, a combined Bell Atlantic and GTE
would be the second largest telecommunications company in the country behind only AT&T.
Based on the extensive breadth of the companies' operations, the proposed merger between Bell
Atlantic and GTE requires the review of several government agencies, including the DOJ, state
public utility commissions, and this Commission.
A. The Merger Review Process
1. Department of Justice Review
13. The DOJ reviewed the proposed transaction as part of the pre-merger review process
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On May 7, 1999, the DOJ
filed a civil antitrust complaint alleging that the proposed transaction would violate section 7 of
the Clayton Act by lessening competition in the markets for wireless mobile telephone services in
ten major trading areas (MTAs), constituting sixty-five metropolitan statistical areas (MSAs) and
rural statistical areas (RSAs) in nine states. A proposed final judgment was also filed, requiring
either Bell Atlantic or GTE to divest its wireless telephone business in the markets where the two
companies' businesses overlap. After Bell Atlantic entered into a partnership with Vodafone to
form a national wireless business, the DOJ amended the complaint and proposed final judgment to
address the additional cellular overlap areas resulting from Bell Atlantic's affiliation with
Vodafone. The DOJ concluded that the combined effect of the Bell Atlantic/GTE and Bell
Atlantic/Vodafone transactions would be to lessen competition in the markets for wireless
services in thirteen MTAs and ninety-six MSAs and RSAs in fifteen states. On April 20, 2000,
the parties submitted to the court a proposed final judgment that requires Bell Atlantic, GTE, or
Vodafone to divest wireless assets in ninety-six cellular overlap markets.
1. State Review
14. The proposed merger of Bell Atlantic and GTE also has required the review of or
notification to a number of state governing bodies. Twenty-seven states conducted proceedings
examining the proposed transaction, each approving it and many imposing conditions. Twenty-
three additional states declined jurisdiction over the transaction. On March 2, 2000, the
California Public Utilities Commission granted the Applicants the final necessary state approval
for the proposed merger.
1. Commission Review
15. Bell Atlantic and GTE filed their initial applications for transfer of control on October
2, 1998, requesting Commission approval of the transfer of control to Bell Atlantic of licenses and
lines owned or controlled by GTE or its affiliates or subsidiaries. More than fifty parties have
filed timely comments or petitions to deny the application. In addition, the Commission held a
series of three public forums at which a number of parties expressed their views on the proposed
merger, including the Applicants, states, economists, and consumer groups, community
organizations, and industry participants.
16. On February 24, 1999, in response to concerns raised by Commission staff, Bell
Atlantic and GTE filed a Report on Long Distance Issues in Connection with their Merger and
Request for Limited Interim Relief. With respect to long distance voice services, Applicants
requested that the Commission grant a reasonable transition period to permit GTE to transfer to
other interexchange carriers its existing customers within Bell Atlantic's region. Applicants also
requested that the Commission grant interim relief to enable the merged firm to continue
providing interLATA data services through GTE's Internet backbone provider, GTE
Internetworking, while the merged company pursued section 271 authority for Bell Atlantic's in-
region states. The Applicants subsequently asked that the Commission hold its Request for
Interim Relief in abeyance pending later filings addressing the long distance issues. On April 14,
1999, Applicants requested that the Commission suspend processing of their merger application
pending a further submission following Bell Atlantic's filing with the Commission of its
application for section 271 relief in New York.
17. Bell Atlantic and GTE renewed and supplemented their initial application by
submitting a January 27, 2000 Supplemental Filing, which included their Internet backbone spin-
off proposal and a set of proposed merger conditions to which they voluntarily committed. Bell
Atlantic and GTE subsequently clarified the Internet backbone proposal and their proposed
merger conditions through subsequent filings made on April 3, 2000, April 14, 2000, April 28,
2000, May 19, 2000, June 7, 2000, and June 14, 2000. On April 28, 2000, the Commission
sought further comment on the altered spin-off proposal and modified merger conditions.
XVIII. Public interest framework
19. Before approving the transfer of control of licenses and lines in connection with the
proposed merger, the Commission must determine, pursuant to sections 214(a) and 310(d) of the
Communications Act, that the proposed transfers serve the public interest. In accordance with
the Act's public interest standard, we must weigh any potential public interest harms of the
proposed transaction against the potential public interest benefits to ensure that, on balance, the
merger services the public interest, convenience, and necessity. In doing so, we examine, inter
alia, possible competitive effects of the proposed transfers and measure the effect of the merger
on both the broader aims of the Communications Act and federal communications policy.
20. Section 214(a) of the Communications Act generally requires carriers to obtain from
the Commission a certificate of public convenience and necessity before constructing, acquiring,
operating or engaging in transmission over lines of communication, or before discontinuing,
reducing or impairing service to a community. In this case, section 214(a) requires the
Commission to find that the "present or future public convenience and necessity require or will
require" Bell Atlantic to operate the acquired telecommunications lines and that "neither the
present nor future public convenience and necessity will be adversely affected" by the
discontinuance of service from GTE. Section 310(d) provides that no construction permit or
station license may be transferred, assigned, or disposed of in any manner except upon a finding
by the Commission that the "public interest, convenience, and necessity will be served thereby."
Accordingly, the Commission must determine that the proposed transfer of licenses from GTE to
Bell Atlantic "serves the public interest, convenience, and necessity" before it can approve the
transaction.
21. The public interest standard under sections 214(a) and 310(d) involves a balancing
process that weighs the potential public interest harms of the proposed transaction against its
potential public interest benefits. The Applicants bear the burden of proving by a preponderance
of the evidence that, on balance, the proposed transaction serves the public interest. In applying
this public interest test, the Commission considers four questions: (1) whether the transaction
would result in a violation of the Communications Act; (2) whether the transaction would result in
a violation of the Commission's rules; (3) whether the transaction would substantially frustrate the
Commission's ability to implement or enforce the Communications Act; and (4) whether the
merger promises to yield affirmative public interest benefits that could not be achieved without the
merger.
22. Our analysis of public interest benefits and harms under parts three and four of the
public interest test includes, but is not limited to, an analysis of the potential competitive effects of
the transaction, as informed by traditional antitrust principles. Although an antitrust analysis
focuses solely on whether the effect of a proposed merger "may be substantially to lessen
competition," the Communications Act requires the Commission to apply a different standard.
The Commission must make an independent public interest determination that includes an
evaluation of the merger's likely effect on future competition. Because Congress has determined
that additional competition in telecommunications markets will better serve the public interest, in
order to conclude that a merger is in the public interest, the Commission must "be convinced that
it will enhance competition, not merely lessen it."
23. Where necessary, the Commission can attach conditions to a transfer of lines and
licenses to ensure that the public interest is served by the transaction. Section 214(c) of the Act
authorizes the Commission to attach to the certificate "such terms and conditions as in its
judgment the public convenience and necessity may require." Similarly, section 303(r) of the
Communications Act authorizes the Commission to prescribe restrictions or conditions, not
inconsistent with law, that may be necessary to carry out the provisions of the Act. Indeed,
unlike the role of antitrust enforcement agencies, the Commission's public interest authority
enables it to rely upon its extensive regulatory and enforcement experience to impose and enforce
conditions to ensure that the merger will yield overall public interest benefits.
24. Finally, as noted in the SBC/Ameritech and AT&T-TCI Orders, many transfer
applications on their face demonstrate that the merger would yield affirmative public interest
benefit and would neither violate the Communications Act or Commission rules nor frustrate the
policies and enforcement of the Communications Act. Such cases do not require extensive
review by the Commission and interested parties. Because that is not the case with respect to this
proposed transaction, we analyze the potential public interest harms and benefits of this proposed
merger, absent conditions, in the following sections.
XXV. Compliance with Section 271
26. As an initial matter, we first consider whether the Applicants' proposed transaction
would result in a violation of the Communications Act. Section 271 of the Act prohibits a Bell
operating company or its affiliate from entering the in-region, interLATA market unless and until
the BOC demonstrates that its local market is open to competition by satisfying a checklist of
market-opening and other requirements set forth in the statute. Bell Atlantic is comprised of
several Bell operating companies, and, to date, has obtained section 271 authorization only in
New York. GTE is not comprised of any BOCs and thus, prior to the contemplated license
transfer application, was not subject to section 271's restrictions. At the time of the Application,
GTE in fact provided interLATA services nationwide through various subsidiaries.
27. In anticipation of its merger with Bell Atlantic, GTE agreed to exit various interLATA
businesses, including resold voice long distance service, in the section 271-restricted Bell Atlantic
states before closing the merger. GTE Communications Corporation, for example, terminated
its direct dialing, dial around, 800 toll free, operator, private line and frame relay data services,
and agreed to deactivate all calling cards of customers in the affected states and cease origination
of calling card calls in that region. In addition, GTE transferred to unaffiliated carriers the
dedicated capacity services provided by GTE Data Services Incorporated, GTE
Telecommunication Services, Inc. and GTE Network Services, and interLATA transmission
services provided by GTE.net that originated in Bell Atlantic states other than New York. GTE
also agreed to divest the retail private line resale business of GTE Telecom Inc. (GTE Telecom)
prior to merger close. With respect to GTE Telecom's private line wholesale services, GTE is
seeking Commission approval to transfer corporate control of GTE Telecom to Genuity.
28. Genuity (formerly GTE Internetworking), a wholly-owned subsidiary of GTE, is a
facilities-based Internet infrastructure supplier offering a comprehensive set of managed Internet
access, web hosting and value-added e-business services, such as virtual private networks for
secure data transmission and security services. It operates a global network consisting of
domestic broadband fiber optic cable, points of presence where Internet access is provided to end
users and secure data centers. With its extensive network and customer base, Genuity is
commonly regarded as a Tier I Internet backbone provider.
A. Applicants' Spin-off Proposal
29. Under the Applicants' spin-off proposal, GTE will transfer substantially all of
Genuity's nationwide data business to a separate public corporation. Before merging with Bell
Atlantic, GTE will exchange its stockholdings in Genuity for shares of a new class of common
stock, Class B common stock. Through an initial public offering (IPO) conducted prior to closing
the merger with Bell Atlantic, public shareholders will purchase shares of Genuity Class A
common stock initially carrying 90.5 percent of the voting rights and the right to receive 90.5
percent of any dividends or other distributions. The merged Bell Atlantic/GTE's Class B shares
will carry 9.5 percent of the voting rights and the right to receive 9.5 percent of any dividends or
other distributions, along with a conversion right and certain investor safeguards. Subject to
satisfying certain conditions, the Class B shares will be convertible into newly-issued shares
representing 80 percent of the shares of Genuity outstanding immediately after the IPO.
30. Conditions to Sale or Exercise of Conversion Rights. The potential for the holder of
the Class B shares to convert those shares into a greater economic interest is subject to a number
of restrictions described below.
· 50-Percent Threshold. Unless and until the merged Bell Atlantic/GTE eliminates section 271
restrictions as to at least 50 percent of total Bell Atlantic in-region lines, the Class B holder
will only have the right to convert the shares into Class A stock representing a 10-percent
interest in Genuity. If the merged firm fails to meet this 50-percent threshold within five
years from the closing of the merger, the Class B shares will never be convertible into more
than a 10-percent interest, and the public shareholders' ownership of at least 90 percent of the
company will not be diluted. Thus, if the merged entity were to sell all or a portion of the
Class B shares before meeting the 50-percent threshold, the shares would be convertible into
only 10 percent, or the proportionate lesser amount, of Genuity's then-outstanding shares.
Similarly, if Bell Atlantic/GTE were to attempt to convert the Class B shares before satisfying
the 50-percent threshold, the shares would be convertible only into Class A common stock
representing 10 percent of the then-outstanding shares of Genuity.
· 95-Percent Threshold for Bell Atlantic/GTE Conversion. If the merged firm satisfies the 50-
percent threshold, the ability of Bell Atlantic/GTE itself to convert remains subject to a further
restriction. The merged firm can exercise the right to convert the Class B shares into shares
representing approximately 80 percent of the shares of Genuity outstanding immediately after
the IPO only if it eliminates section 271 restrictions as to at least 95 percent of Bell Atlantic
in-region lines within five years from merger closing, and eliminates any section 271
restrictions with respect to all remaining lines. If, therefore, Bell Atlantic/GTE satisfies this
95-percent threshold, it can exercise the Class B conversion right for the purpose of
immediately bringing Genuity's business into compliance with section 271. As set forth in an
agreement between the merged firm and Genuity, however, the merged firm may require
Genuity to reconfigure its operations to conform to section 271 in the states for which the
merged firm has not obtained section 271 authorization only if those states in the aggregate
represent no more than 3 percent of Genuity's revenues and if Bell Atlantic/GTE reimburses
Genuity for the costs of coming into compliance with section 271. Under the proposal, at
least 90 days before the merged firm intends to convert and require Genuity to reconfigure its
operations, it will notify the Commission and submit to the Chief of the Common Carrier
Bureau a plan for how it would reconfigure Genuity's operations in the relevant states.
If the merged Bell Atlantic/GTE entity itself converts the Class B shares, they will convert
into the appropriate number of Class C shares, which are identical to Class A shares except
that they carry enhanced voting rights (five votes per share). If the merged firm transfers the
Class B shares to another entity, that party may only convert them into Class A shares with
ordinary voting rights (one vote per share).
Even if the merged firm eliminates these section 271 restrictions and is able to convert, it may
not retain the portion of any appreciation that is attributable to Bell Atlantic in-region states
during the period before it obtained section 271 authorization for those states. Instead, that
portion of the appreciation will be transferred to Genuity's public shareholders. The relevant
portion of appreciation will be calculated based on the number of Bell Atlantic in-region
access lines compared to the number of the merged firm's access lines nationwide.
· Options between 50 and 95 percent. If the merged firm meets the 50-percent threshold but
not the 95-percent threshold, it can dispose of all or a portion of its Class B shares, but the
merged firm can only retain sale proceeds that do not exceed the value of its original
investment (or ratable portion thereof) plus a return based on the Standard & Poor's 500
Index. Nonetheless, if Bell Atlantic/GTE intends to dispose of all or a portion of its shares,
it must first offer to sell the shares to Genuity for an amount that is the lesser of the value of
its original investment (or ratable portion thereof) plus a return based on the Standard &
Poor's 500 Index or the fair market value of such shares at the time of their disposition.
Genuity may pay the purchase price through a marketable debt instrument that will bear
interest at a commercially reasonable rate. If Genuity declines to purchase Bell
Atlantic/GTE's shares, the merged firm would be able to transfer the shares to a disposition
trustee for sale to third parties, subject to the limitation on the firm's receipt of sales
proceeds.
· Extension of Conversion Period. If, at the end of five years, Bell Atlantic/GTE has eliminated
section 271 restrictions as to at least 90 percent of total Bell Atlantic in-region lines (or 95
percent but for one state), Bell Atlantic/GTE may file a petition with the Commission
requesting an additional year in which to eliminate the remaining section 271 restrictions. The
Commission shall have the discretion whether to approve such a petition. Moreover, if at
the end of the five-year conversion period, litigation is pending over whether Bell
Atlantic/GTE has eliminated section 271 restrictions as to certain lines, and if a court
subsequently determines that the company has eliminated such restrictions, then the merged
entity shall be deemed to have eliminated those restrictions within the conversion period.
2. Officers and Directors. Under the proposed structure for the Genuity board of
directors, Genuity ultimately will have a thirteen-member board, twelve of whom are periodically
elected by the Class A shareholders. Bell Atlantic/GTE, as the holder of the Class B shares, will
designate the other member. In order to establish an independent board, GTE will appoint six
directors before the IPO: one will be the CEO of Genuity, one will be designated by GTE (as the
Class B designee), and the other four will be independent directors who have no prior relationship
with Bell Atlantic or GTE. Within 90 days after the IPO, the four independent directors will
select seven additional directors who have no prior relationship with Bell Atlantic or GTE. This
will bring the total board membership to 13 directors, a majority of whom will have been selected
after the IPO.
3. As soon as possible, but no later than nine months after the IPO, all directors other
than the Class B designee will stand for election by the Class A shareholders. From that point,
every year four of the twelve publicly elected directors will stand for reelection. The Class B
director stands for election annually. The Class B director will abstain from any vote until the
board consists of at least ten members, and will at no time serve as chairman of the board.
4. The officers and directors of Genuity will owe fiduciary duties to the public
shareholders. Incentive compensation for Genuity's managers will be tied to the performance of
Genuity and the value of its publicly traded stock, not to the financial performance or stock value
of the merged Bell Atlantic/GTE.
5. Investor Safeguards. The Class B shares also contain certain investor safeguards
designed to protect the merged firm's interest as a minority investor and potential future majority
shareholder. The merged company will have these rights only until it converts its Class B
shares or no longer has the possibility of converting into more than a 10-percent interest. These
safeguards include the right to approve certain fundamental business changes such as a change in
control of Genuity or the sale of a significant portion of its assets. Some safeguards require a
vote of the Class B shares, while others require Genuity to obtain consent from the merged
company. In addition, no single holder or group of Class A shareholders may vote more than
20 percent of the Class A stock. Moreover, insofar as Genuity's business plan does not
contemplate the acquisition of a traditional voice long distance service provider, pursuant to these
investor safeguard rights, Bell Atlantic/GTE will withhold its consent from Genuity's acquisition
of such a carrier absent Commission approval.
6. Financing. A major source of Genuity's capital would consist of the proceeds from
the sale of Class A stock in the IPO. Additional funding required by Genuity's business
operations would be raised from the public markets, possibly by issuing additional Class A shares,
by issuing debt to the public, or by arm's-length commercial loans, which could include loans
from Bell Atlantic/GTE. Under the proposal, however, if Bell Atlantic/GTE loans money to
Genuity, it could provide no more than 25 percent of Genuity's aggregate debt financing.
7. Commercial Contracts. All commercial interactions between the merged Bell
Atlantic/GTE (and any affiliates) and Genuity will be pursuant to commercially reasonable
contracts. For example, the companies will enter into contracts for the merged company to
provide transitional administrative support services. Each contract will have a term of one year or
less, and will be terminable at any time by Genuity without penalty. In view of the transitional
nature of the contracts, the contracts will not be renewed by the parties. Although the contracts
enable the merged firm to provide some human resources administrative support, the merged firm
will not have any role in hiring or firing Genuity employees. In addition, Genuity will not rely
upon any network monitoring from the merged firm after October 31, 2000.
8. Because a significant portion of Genuity's business is outside the Bell Atlantic region
or in New York, where Bell Atlantic has obtained section 271 approval, the companies will enter
into a marketing agreement for the period before conversion of the Class B shares. Pursuant to
the Purchase, Resale and Marketing Agreement, Bell Atlantic/GTE will market Genuity's services
(or the two companies will market their services jointly) as and where permitted by law. In
New York, for example, where Bell Atlantic has received section 271 approval, the merged firm
and Genuity will jointly market Genuity's Internet connectivity services. The Agreement,
however, provides that Bell Atlantic/GTE will not provide or joint market any interLATA service
of Genuity in any state where Bell Atlantic does not have interLATA authority. The
Agreement is also non-exclusive, so that either company may purchase from or sell to others.
9. Independent Auditor. Under their proposal, the Applicants further commit to hire an
independent auditor, acceptable to the Chief of the Common Carrier Bureau, to monitor ongoing
compliance with the terms of the spinoff proposal.
A. Discussion
10. Section 271 of the Act states that "[n]either a Bell operating company, nor any affiliate
of a Bell operating company, may provide interLATA services" except as set forth in that
section. The term "affiliate" is not defined in section 271, but is defined generally in section
3(1) of the Act:
The term "affiliate" means a person that (directly or indirectly)
owns or controls, is owned or controlled by, or is under common
ownership or control with, another person. For purposes of this
paragraph, the term "own" means to own an equity interest (or the
equivalent thereof) of more than 10 percent.
11. In considering whether the proposed merger of Bell Atlantic and GTE would result in
a violation of the Communications Act, we must first determine whether Genuity (following its
proposed spin-off from GTE) would be owned or controlled by the merged entity within the
meaning of section 3(1) because such ownership or control would render Genuity an "affiliate" of
the merged entity.
1. Ownership
12. For the reasons set forth below, we conclude that Bell Atlantic/GTE will not own
Genuity within the meaning of section 3(1) of the Act. We find that, prior to exercise of its
conditional conversion right to acquire additional shares, Bell Atlantic/GTE will not directly or
indirectly own an equity interest or its equivalent in Genuity of greater than 10 percent. First, we
establish that an equity interest under section 3(1) can include conditional conversion rights.
Second, we apply a three-part test to determine whether the conversion right at issue should be
deemed an equity interest or its equivalent. Under the facts of the instant proceeding, we
conclude that it should not.
a. Statutory Meaning and History of "Equity Interest" and its
"Equivalent"
13. In defining the term "affiliate," section 3(1) specifies that "[f]or purposes of this
paragraph, the term 'own' means to own an equity interest (or the equivalent thereof) of more
than 10 percent." The terms "equity interest" and the "equivalent thereof" are not defined in
section 3(1) or elsewhere in the Act. The issue in this case is whether Bell Atlantic/GTE's
retention of Class B shares, comprising 9.5 percent of Genuity's outstanding shares and carrying a
potential right to convert into newly-issued shares representing up to 80 percent of Genuity upon
satisfaction of certain conditions, represents "an equity interest (or the equivalent thereof) of more
than 10 percent." We therefore must determine whether the merged entity's conditional
conversion right should be considered an equity interest or its equivalent that is presently
attributable to Bell Atlantic/GTE or whether this right does not become an equity interest or its
equivalent until exercised. To answer this question, our first step is to determine whether the
terms "equity interest (or the equivalent thereof)" include conditional interests.
14. Both the Applicants and AT&T have asserted facially plausible, yet opposing,
meanings for the terms "equity interest" and its "equivalent." The Applicants interpret these
terms narrowly and argue that a conversion right, or an option to acquire an equity interest in the
future, is not an "equity interest" prior to conversion if it confers none of the three legal rights
that, they contend, traditionally attend equity ownership: to vote, to participate in corporate
earnings, and to participate in dissolution proceeds. This interpretation, they maintain, is
supported by the statute's use of the present tense ("owns," "is owned," and "is under common
ownership"), which they claim evidences that Congress intended to capture only current
possession of equity interests, not interests that give rise to an equity interest in the future. In
further support of their interpretation, the Applicants cite the treatment of options in other
contexts, including bankruptcy and accounting principles, in court cases construing the notion
of equity ownership and the rights conferred through options, and Fletcher's Cyclopedia, which
states that "[a]n option to purchase stock does not vest in the prospective purchaser an equitable
title to, or any interest or right in the stock."
15. Conversely, AT&T and other commenters interpret these terms broadly, contending
that the term "equity interest" plainly encompasses a conversion right embedded in an underlying
equity security, as well as other convertible interests such as standalone options. Specifically,
AT&T claims that options are treated as equity under securities law, bankruptcy law,
corporate law and financial accounting practices. In particular, AT&T cites the American
Law Institute's Principles of Corporate Governance, which defines an "equity interest" as an "an
equity security in a corporation," which in turn is defined to include any instrument "convertible
[into] a share in a corporation."
16. The parties also disagree on the scope and meaning of term "equivalent" under section
3(1). The Applicants maintain that the "equivalent" of an equity interest refers to "those
arrangements that confer the same (or very similar) participation rights as equity interests."
AT&T, on the other hand, interprets the term more flexibly to mean something equal in value or
worth. Consequently, AT&T regards as decisional the value that the market would place on Bell
Atlantic/GTE's Class B shares, which it asserts would amount to nearly 80 percent of Genuity.
We find that both of these positions are plausibly supported by common uses of the term. The
first of Black's Law Dictionary's two definitions of the term "equivalent," meaning "[e]qual in
value, force, amount, effect, or significance," could be read to support AT&T's assertion that
the primary indicia of ownership is the amount of Genuity's value attributed by the market to the
Class B shares. By incorporating functional concepts, however, the second definition,
"[c]orresponding in effect or function; nearly equal; virtually identical" seemingly supports a
more narrow interpretation related to the indicia of ownership asserted by the Applicants (i.e.,
voting rights, earnings rights and liquidation rights). Other definitions of "equivalent" similarly
reference both value and effect.
17. In light of the varying authorities cited by the Applicants and the merger opponents,
we reject the parties' contrary assertions that the meaning of the term "equity interest" or its
"equivalent" in the context of a conditional conversion right is clear and unambiguous. Our
examination of corporate law and the other authorities cited produces no plain meaning of the
terms when applied to a conditional conversion right. Although AT&T cites ALI principles, we
believe that the ALI definition proves too much in the case of a conditional conversion right. If,
for example, a party held a convertible instrument for which the conversion right was expressly
conditioned upon something that was nearly certain not to occur, we believe that a bright line
principle treating that interest as equity may result in unintended consequences. For this reason,
we believe that we must look to other sources to determine a reasonable meaning of "equity
interest (or the equivalent thereof)" in the context of a conditional conversion right. Moreover,
we believe that if Congress intended that the Commission strictly apply the securities law
understanding of an equity interest, reflected in the ALI principles cited by AT&T, it could have
indicated as much in the language of the statute. Indeed, in another provision of the Act,
Congress did just that and expressly defined "control" as having the same meaning as that term is
defined in Securities and Exchange Commission regulations.
18. The issue of whether a conditional conversion right constitutes an "equity interest (or
the equivalent thereof)" under section 3(1) presents a novel question for the Commission.
Although the Commission has considered the treatment of options and conversion rights in other
contexts, we find that these do not control our analysis of "equity interest" or its "equivalent"
under section 3(1). As the Applicants point out, the Commission traditionally has not attributed
options, warrants and other convertible securities as current ownership interests under the CMRS
spectrum cap rules, the LEC/LMDS cross-ownership rules, the application of section 310's
foreign ownership restrictions, and the broadcast and cable attribution rules. We
nonetheless agree with AT&T's observation that the "equity plus debt" rule recently adopted as
part of the broadcast and cable attribution rules implies that such interests, if of a certain size, may
be considered. As AT&T further observes, the Commission's rules for designated entities in
spectrum auctions treat options "as if the rights thereunder already have been fully exercised."
We find, therefore, that the Commission's treatment of convertible instruments differs depending
on the structure and purposes of the specific statute at issue. Insofar as none of precedents cited
seek to interpret section 3(1) or the specific terms "equity interest" and its "equivalent," we do
not find that any particular precedent is controlling for our purposes. In addition, we note that the
equity plus debt rule in the broadcast and cable attribution context seeks to identify not only
entities with ownership and control, but also entities with "influence" over a licensee. Further, we
note that, unlike the broadcast and cable attribution context, here we are not concerned with
promoting localism or a diversity of viewpoints. We conclude therefore that none of these
precedents controls our analysis.
19. Thus, employing the traditional tools of statutory construction, we conclude that the
undefined terms "equity interest" or its "equivalent," as discussed above, are susceptible to
varying interpretations. Neither the text of statute nor the context in which the terms "equity
interest (or the equivalent thereof)" are used provide any specific guidance on the characterization
of a conditional conversion right.
20. Insofar as the terms are ambiguous, we turn next to the legislative history for
guidance. Congress did not specifically address the question of the status of a conditional interest
as an "equity interest" or its "equivalent," and we find that the legislative history is ultimately
inconclusive. The Applicants contend that Congress intended the term "affiliate" to have the
meaning set forth in the MFJ. There is some suggestion that, in adding section 3(1) as part of the
1996 Act, Congress may have derived the definition of "affiliate" from the MFJ and specifically
intended it to have the same meaning as under the MFJ. Section IV(A) of the MFJ contained a
definition of an "affiliate" that closely parallels section 3(1)'s language, with the only substantive
change reflecting a reduction in the percentage of equity ownership from 50 percent in the MFJ to
ten percent in section 3(1). Committee Reports from bills that preceded the 1996 Act suggest
that the definition of "affiliate" in those earlier bills was drawn from the MFJ and was intended to
have the same meaning:
Section 106 of the bill contains the definitions to the terms used in
title I of the Act. The definition of "affiliate" [and other terms
relating to the BOC restrictions] are drawn from definitions in the
MFJ. The Committee intends that these terms have the same
meaning as under the MFJ.
21. While this history is instructive, in the end we find the Applicants' argument that the
MFJ controls in interpreting "equity interest" and "equivalent thereof" unpersuasive and that the
wholesale adoption of factors employed under the MFJ would be reading too much into the
legislative history. The 1996 Act expressly overhauled the MFJ in favor of a pro-competitive and
deregulatory regime designed to open all telecommunications markets to competition, and we
decline to import into the Act an understanding of the term "affiliate" derived solely from the
MFJ.
a. Statutory Purpose and Structure
22. Accordingly, having examined the statutory text, context and legislative history, we
decline suggestions by both the Applicants and merger opponents that we adopt a bright-line
characterization of conditional interests. Rather, based on the context and relevant legislative
history, we can reasonably conclude that the terms "equity interest (or the equivalent thereof)"
neither encompass nor exclude all forms of conditional interests. We find that some conditional
interests may appropriately be deemed an equity interest or its equivalent, thereby potentially
giving rise to an affiliate relationship, while others may not. AT&T's overly broad interpretation,
however, could prohibit relationships that involve the potential right to acquire an equity interest,
no matter how unlikely the occurrence of the contingency. Similarly, the Applicants' overly
narrow interpretation could fail to include some investments that, by their nature, enable the
holder to obtain material benefits from conduct that the holder is restricted from engaging in itself,
or that give rise to the very incentives that the particular statute at issue is designed to prevent.
We note that our recognition that some conditional interests may constitute equity interests
comports with the general notion that certain future interests may be attributable under the
"equity plus debt" exception to the broadcast and cable attribution rules.
23. For these reasons, we reject either of the bright line tests that the parties have
advocated for purposes of section 3(1). Having examined the conflicting corporate law
authorities on the record, we are convinced that they do not resolve the question before us.
Rather, we conclude that our analysis of whether this contingent interest constitutes an equity
interest or its equivalent under section 3(1) should be guided not by any rote application of
corporate or securities law jurisprudence, but by the statutory purposes and the structure of the
1996 Act. Indeed, the divergence of authority regarding characterization of conditional interests
under other fields of law persuades us that Congress could not have intended that we determine
the status of conversionary interests, under section 3(1) of the Communications Act, by reference
to any single external body of law, given the considerable debate and conflicting views on this
question.
24. Therefore, we resolve this issue from the perspective of communications jurisprudence
and the statutory purposes underlying the provisions at issue. In making these determinations, we
will evaluate, on a case-by-case basis, whether exclusion of the particular conditional interest from
the status of an equity interest or equivalent would undermine Congress' intentions. Where
failure to treat a specific conditional interest as an "equity interest (or the equivalent thereof)" --
and thus as an "affiliate" -- would thwart the underlying statutory provision in which the term
"affiliate" is used, we would find that such a conditional interest constitutes an "equity interest or
equivalent." We conclude, therefore, that a close evaluation of statutory purposes is an important
part of any test for determining the characterization of a conditional interest.
25. Before we examine the purposes of the particular statutory provision, we first must
find that the conditional interest at issue is a bona fide "conditional" interest. In other words, we
must be satisfied that the actual exercise of the option or other conditional interest is sufficiently
uncertain that it should not be considered a present equity interest or equivalent. Under this
prong of our test, we will examine whether the occurrence of one or more contingencies to the
exercise of the option is genuinely in question. If the exercise were virtually certain, then we
would deem the interest a present equity interest or equivalent, rather than a bona fide conditional
interest.
26. A third factor is also critical. Recognizing that the term "affiliate" in section 3(1) is
generally invoked in the statute to impose regulatory restrictions that prevent various types of
anticompetitive conduct among related entities, we believe an appropriate factor in evaluating
the scope of the term is whether the acquisition would increase the likelihood that the acquiring
company would discriminate in favor of the company in which it will acquire the conditional
interest. Indeed, through the BOC-specific Act provisions, just as during the MFJ years, BOCs
are constrained from discriminating, and using their bottleneck control in the local and exchange
access markets, to obtain an unfair advantage in the long distance market. Thus, we believe that
ensuring that the acquisition of a conditional interest not result in a BOC's using its monopoly
position to favor related entities (to its own economic advantage) while discriminating against
competitors is plainly relevant and material to our consideration here.
27. In sum, in evaluating whether or not a specific conditional interest constitutes an
equity interest or equivalent thereof under section 3(1), we will consider the following three
factors: (1) whether the conditional interest is subject to a genuine contingency; (2) whether the
interest furthers (or instead undermines) the particular statutory provision at issue; and (3)
whether the interest would increase the likelihood that the acquiring company would discriminate
in a manner that favors or benefits the entity in which it will acquire the conditional interest.
28. The test we have set forth expressly recognizes that some relationships will result in
conditional interests that create an affiliate relationship, while other such interests may not. In this
regard, our case-specific evaluation bears some similarity to that applied under the MFJ. In
examining the status of a BOC's acquisition of a conditional interest, Judge Greene recognized
that not all conditional interests would create relationships that would thwart the BOC line-of-
business restrictions with which he was concerned. By establishing a framework for BOC
acquisitions of conditional interests, Judge Greene implicitly recognized that some conditional
interests would lead to an "affiliated enterprise" relationship, while others would not. While we
consider a different set of factors than those evaluated by Judge Greene, our goals and analyses
have aspects in common. Both the MFJ regime and the 1996 Act evidence concerns about BOC
use of bottleneck control in the local and exchange access markets to obtain an unfair advantage
in the long distance market. Under both the MFJ test and our own, we require that any interests
be truly conditional, with genuine contingencies; and we give serious consideration to an
acquiring carrier's ability or incentive to discriminate so as to advantage the target company or
disadvantage that company's competitors. In the context of construing the 1996 Act and its
numerous statutory requirements, however, we must do more, and accordingly we find pivotal to
our analysis consideration of whether the interest furthers the purposes of the Act, including the
particular statutory provision where the term "affiliate" is used.
29. In analyzing these factors, we recognize, as AT&T points out, that the ambiguous
terms "equity interest" and its "equivalent" are found in a general definitional section of the Act,
and that the defined term, "affiliate," is used throughout the Act. We therefore believe it is
appropriate, in assessing the scope of an ambiguous definition, to examine the instances in which
the term is used, and we have made that a requirement of our test. Thus, we believe that the
framework we establish today could accommodate for any differences required by the particular
statutory provision at issue, to the extent any such differences exist. As noted, however,
several of the references to an "affiliate" are in the specific provisions of the Act that pertain to
the BOCs, and for that reason the MFJ precedent can be instructive.
1. Analysis of the Applicants' Spin-off Proposal
30. In applying the factors to the Applicants' spin-off proposal, we find on this record that
the merged firm's Class B conversion rights are not an "equity interest (or the equivalent
thereof)" under section 3(1) of the Act because (i) their conversion rights are genuinely in
question, (ii) their interest furthers the statutory purposes by increasing the merged entity's
incentive to achieve section 271 compliance throughout the Bell Atlantic territory, and (iii) the
interest will not increase the likelihood that the merged firm would discriminate against Genuity's
rivals.
(i) Genuine Contingency
31. Because the likelihood of the contingency's occurrence is inherently related to the
nature of the instrument as a bona fide conditional interest, we examine first whether the
occurrence of the contingency is genuinely in question. With respect to the Applicants' proposed
spin-off, we find that Bell Atlantic/GTE's ability to convert its shares into greater than 10 percent
of Genuity's outstanding shares is genuinely in question.
32. As an initial matter, we reject the suggestion that Bell Atlantic/GTE's conversion right
is not conditional. First, the terms of the proposed conversion right are conditioned in such a way
that the Class B shares may never be convertible into greater than ten percent of Genuity's
outstanding shares. If Bell Atlantic/GTE fails to achieve section 271 approval representing 50
percent of Bell Atlantic's total access lines within five years, the Class B shares will be convertible
only into ten percent of Genuity's outstanding shares. This 50-percent threshold requirement, as
the Applicants point out, entails a risk that the GTE and Bell Atlantic would never be in a position
to recoup the value of the initial assets that they contributed by obtaining an equity interest
greater than ten percent. Second, the Applicants' proposal contains a significant access line
limitation that renders its ability to convert the Class B shares uncertain. If Bell Atlantic/GTE
fails to achieve section 271 approval representing 95 percent of Bell Atlantic's access lines in five
years, it may receive at most a marketable note, the face value of which is subject to express
limitations. Should Genuity decide not to purchase the interests so tendered, a liquidating trustee
will sell that interest subject also to limitations on the amount that may be realized by the merged
entity. Thus, under the current proposal, Bell Atlantic/GTE will be able to exercise the full
conversion rights to obtain more than 10 percent of the equity shares of Genuity only after the
merged entity has satisfied the 95-percent threshold.
33. We conclude that the 95-percent access line threshold that the merged firm must
achieve in order to exercise the full conversion right represents a genuine contingency. We
therefore reject AT&T's argument, premised on an earlier version of the proposal, that the
conversion right lacks the element of speculation that characterizes a conditional interest. With
respect to the current proposal, nothing in the record suggests that obtaining section 271
approvals representing 95 percent of Bell Atlantic's access lines within five years will be an easy
task. In this regard, we observe that in the four years following the Act, only one such
application has been approved, while several others have been rejected. While we agree with
AT&T that section 271 approval in any given state is primarily within Bell Atlantic's control, we
do not find that this fact requires us to disregard the contingent nature of the 95-percent
threshold. While the tools for satisfying section 271 approval rest with Bell Atlantic, a great
variety of factors can impact the ultimate timing of section 271 approval. In particular, even
though Bell Atlantic has obtained approval in one state, our review focuses heavily on the
performance of a BOC's operations support systems, and Bell Atlantic does not use the same
systems in all of its states. In addition, technical issues, such as problems with its systems or other
network modifications that are necessary to comply with the BOC's obligations under the Act,
might impede the progress made towards compliance. Further, regulatory entities or persons in
addition to this Commission are involved in the section 271 process, most significantly various
state regulatory entities and the Attorney General (to whose evaluation the Commission must
afford "substantial weight"). Therefore, while a BOC does, in the final analysis, hold the key to
its own section 271 success, a number of external or technical factors continue to pose challenges
to good faith efforts to satisfy the statutory standards that govern section 271 approval by this
agency. We believe that, in judging the nature of the contingency, the fact that this Commission
must approve section 271 applications covering 95 percent of Bell Atlantic's access lines prior to
it having any right to convert makes this right genuinely contingent as to Bell Atlantic.
34. We do not find that the absence of a payment by the merged firm to convert its right
eviscerates the contingent nature of the instrument so as to render the instrument a present equity
interest or its equivalent. Although the pre-paid nature of the Applicants' conversion right is
not typically present in option arrangements, we do not believe, where a conversion right is
otherwise contingent, that paying for that right up front will automatically render it a present
interest. The up-front payment does not change the fact that the conversion right may never be
exercised. The 95-percent access line threshold in the Applicants' proposal provides sufficient
assurance that the full conversion right may never be exercised, regardless of any payment
required for actual conversion.
35. We also find unavailing arguments by merger opponents that because the conversion
right could be sold for value after the merged entity met the 50-percent threshold, it should
therefore be characterized as equity. That argument is not persuasive in light of the terms of the
current proposal. Specifically, under the proposal that we consider herein, we find that, if the
conversion right were exercised between 50 and 95 percent, it would most properly be
characterized as debt, not equity. The Commission, in other contexts, has established criteria to
distinguish bona fide debt from equity that examine (1) whether there is a written unconditional
promise to repay the money on demand and to pay a fixed rate of interest; (2) whether there is
subordination to or preference over any indebtedness of the company; (3) the company's
debt/equity ratio; (4) whether the alleged debt is convertible to stock; and (5) the relationship
between holdings of stock in the corporation and holdings of the interest in question. The
Applicants' proposal provides for a note that appears to satisfy the first, second, fourth and fifth
prongs. The note must be payable upon demand and at a fixed rate of interest once issued,
would not be convertible to equity and would be unsubordinated to other indebtedness of
Genuity. In addition, there is no indication that the debt instrument would confer any of the
benefits normally reflected in corporate ownership. While satisfaction of the criteria, and in
particular the third factor, can be assessed conclusively only at such time as Genuity may choose
to purchase the shares from the merged entity, we anticipate that Genuity would likely finance any
note, or arrange to pay it off on an accelerated basis, by raising capital through such measures as a
secondary offering. Under that circumstance, we would expect that the company's debt-equity
ratio would be well within a range adequate to find that the note were debt. Consequently, if we
were to apply these factors to the Applicants' potential debt instrument, we would likely find that
the debt instrument would properly be considered bona fide debt. We expect the Applicants to
inform the Commission if this contingency arises and to provide the Commission with any
agreements between the Applicants and Genuity or the liquidating trustee.
36. We also disagree with opponents of the merger that the value the public places on the
IPO shares should control our assessment of the likelihood of the contingency. Prior to any
potential conversion, which may never occur, the merged entity is not entitled to 80 percent of the
economic incidents of Genuity's operation, such as flowing through operating losses for tax
purposes or obtaining dividends or other distributions beyond 10 percent. Although AT&T and
other merger opponents claim that, under an earlier version of the proposal, the post-IPO public
shareholders will value their interest as approximately 20 percent of Genuity, we find that the
likelihood of the contingency depends upon Bell Atlantic's showing of compliance with the
requirements of section 271 of the Act, matters within the Commission's expertise. Our
assessment of the strength of a contingency predicated on section 271 compliance, therefore, may
differ from the perception of market participants who value securities using forward-looking
valuation methodologies, even if those approaches seek to weigh the likelihood that certain
contingencies will take place. In addition, countering the emphasis that AT&T places on the
market's perception of the value of the company is the actual accounting treatment of these assets
the Applicants have assured us that they will not be considered equity until converted. Thus,
where the market may view the occurrence as not contingent, established accounting practices
support that these assets should not be treated as equity prior to actual conversion.
(i) The Purposes of Section 271
37. We find that Bell Atlantic/GTE's retention of a conditional interest in Genuity is
consistent with and furthers the purposes underlying section 271, the particular statutory
provision at issue in this case. In examining the effects of the conditional interest in light of the
purposes of section 271, we believe it is relevant to consider whether the conditional interest is so
significant that it would economically or otherwise disincentivize or divert resources from the
carrier's obligations under the Act. Thus, in examining the status of a conditional interest under
the 1996 Act, we are not concerned solely with the size of the investment but rather with the
effect of the investment on the purposes of the particular statute at issue. As explained below, we
find that the spin-off proposal will increase the merged firm's incentives to complete the section
271 process quickly so as not to lose the right to reacquire ownership and control of Genuity.
38. The Commission has often expressed section 271's dual underlying objectives. First,
section 271 seeks to bring additional competition to the long distance market by offering the
BOCs the potential opportunity to participate in that market. Second, by conditioning BOC
entry into the in-region, interLATA market on the BOC opening its local markets to competition,
section 271 seeks to facilitate entry by new entrants into the BOC's local exchange market.
Together, these dual objectives further the overall purpose of the 1996 Act in facilitating
competition in all telecommunications markets by fundamentally altering the incentives for market
entry and by eliminating remaining monopoly bottlenecks. Congress therefore used the promise
of long distance entry as an incentive to prompt the BOCs to cooperate in facilitating competition
in their local markets.
39. We find that, rather than disincentivize the merged firm from opening its local markets,
the spin-off proposal will provide Bell Atlantic with a substantial and compelling incentive to
obtain section 271 authority quickly in order to reintegrate the operations of Genuity. Specifically,
the spin-off proposal places Bell Atlantic under a time restriction requiring it to obtain section 271
authority representing 95 percent of its access lines within five years in order for the merged firm
to acquire the right to convert the assets into a controlling interest. Moreover, as discussed
below, because the spin-off proposal requires the merged firm to ratably disgorge appreciation
attributable to the period before it obtains section 271 approvals in the relevant states, Bell
Atlantic/GTE has a substantial incentive to obtain section 271 authorizations as expeditiously as
possible. In addition, the risk that the merged firm will fail to obtain section 271 authority
representing 50 percent of Bell Atlantic's access lines, and thereby lose its ability to recoup the
value of the assets spun off to Genuity beyond a 10-percent interest, will provide a potent
incentive for the merged firm to obtain section 271 authority quickly. In particular, because the
spin-off involves all of the assets of Genuity, some of which are located outside of Bell Atlantic's
region and could potentially be owned and operated by the merged firm lawfully, the shareholders
of the combined firm bear the risk of losing the value of these out-of-region assets. This heavy
shareholder burden should inspire Bell Atlantic/GTE's management to expend considerable
resources in pursuit of demonstrating the openness of its local markets. Thus, the Applicants'
proposal is designed to enhance Bell Atlantic's desire to satisfy the market-opening criteria
established by Congress and thereby ensure that consumers will enjoy the long term benefits of
competition among telecommunications providers.
40. We also reject arguments by merger opponents that the spin-off proposal enables Bell
Atlantic/GTE to gain impermissibly the appreciation of a prohibited entity or realize substantial
material benefits prior to attaining section 271 authorization. Rather, we find that, by requiring
the merged firm to ratably disgorge appreciation attributable to the period before it obtains
section 271 approval in the relevant states, the proposal gives the merged firm an added incentive
to obtain section 271 authorizations as quickly as possible. In particular, AT&T and others
criticized an earlier version of the Applicants' proposal that would have allowed the merged
entity, if and when it obtained the requisite approval under section 271, to convert its interests
into shares of Genuity that would fully capture any prior appreciation in the value of Genuity
shares, including appreciation attributable to Genuity's interLATA activities in states in which the
merged entity did not at the time have section 271 approval. These opponents argued that the
potential retroactively to capture appreciation attributable to what were at the time prohibited
services was evidence of "ownership" and diminished the incentive to comply with section 271
prior to the five-year deadline. The Applicants revised the proposal to address this concern by
excluding from the benefits captured by Genuity upon conversion the amount of appreciation
roughly proportional to revenues from areas in which section 271 approval had not yet been
obtained. Thus, rather than having an incentive to delay section 271 approval, the merged entity
will have an incentive to obtain approval as quickly as possible so that it may fully participate in
any appreciation in the value of its potential interest.
(i) Likelihood of Discrimination
41. We recognize that, through its ownership of the Class B shares, the merged firm has
an incentive to enhance the value of Genuity's stock. Although Bell Atlantic/GTE's retention of a
conditional interest will increase its incentive to engage in discriminatory behavior, any such
behavior on the merged entity's part would be readily detectable. We find that the significant risk
of detection of any discriminatory conduct on Bell Atlantic/GTE's part should serve to restrain
the company from acting on any incentive to discriminate in favor of Genuity.
42. Although we have no doubt that incumbent local exchange carriers would be able to
use their bottleneck local exchange facilities to discriminate in the provision of Internet and data
services, for the reasons set forth below, we find that any attempt by the merged entity to
discriminate in such a manner would be readily detectable. At the same time, however, we note
the weakness of the argument by opponents of the merger that the Applicants would be able to
discriminate in favor of Genuity. AT&T, for example, provides only a limited discussion in
support of its contention that the merged entity can plainly "discriminate." Although AT&T
notes Bell Atlantic's "continued control of bottleneck local exchange facilities," the Applicants
respond, without contradiction, that Genuity does not currently "rely to any significant degree on
Bell Atlantic's core LEC facilities" Applicants' euphemism for bottleneck facilities "to provide
Internet and data services." Second, AT&T argues that the merged firm could discriminate in
favor of ISPs that resell Bell Atlantic's DSL service by providing superior quality of transport
service to their internet backbone provider. However, the Applicants respond, again without
contradiction, that "traffic from Bell Atlantic's DSLAMs is not directly connected to any Internet
backbone provider," but instead is aggregated and delivered to the ISP premises, where the ISP
controls the link to the Internet backbone provider. In any event, however, we conclude for the
reasons stated below that the merged entity will be unlikely to discriminate because of the
likelihood that any such discrimination would be detected and appropriate enforcement action
would be taken.
43. Specifically, to the extent that Genuity purchases access services, tariffed or otherwise,
from the merged entity, we require the merged entity to report, on a disaggregated, company-
specific basis, certain measurements, all but one of which it currently provides as part of the
Commission's ARMIS requirements. With respect to its provision of high-speed special access
and regular special access services, we require Bell Atlantic/GTE, or any applicable affiliate, to
report: the percent of commitments met; the average interval (in days); the average delay days
due to lack of facilities; the average interval to repair service (in hours) and the trouble report
rate. These measurements should be reported on a monthly basis and made available to the
independent auditor. Thus, if, as ITAA suggests, the merged entity were to attempt to
discriminate by favoring Genuity in the provision of high capacity special access circuits, we
find that this would be detectable by the independent auditor and this Commission.
44. Moreover, if, as ITAA also suggests, the merged entity were to attempt to
discriminate in favor of Genuity by providing it "preferential access" to conditioned copper loops
used to provide advanced services, we find that this behavior would be readily detectable as
well. Specifically, to the extent that Genuity purchases loops from the merged entity as
unbundled network elements pursuant to section 251, we find that any discrimination in the
provisioning of such loops would become apparent in the section 271 approval process. In this
respect, we note that Bell Atlantic/GTE must obtain section 271 approval with respect to 50
percent of its access lines to avoid a major loss. In addition, it cannot convert its interest in
Genuity until it receives approval with respect to 95 percent of its access lines, and will lose part
of any appreciation of Genuity on account of any delay in obtaining section 271 approval. In
order to obtain section 271 approval, of course, Bell Atlantic/GTE must show that it provides
nondiscriminatory access to its bottleneck facilities. In these circumstances, any attempt to use
its bottleneck facilities to discriminate would jeopardize the merged firm's ability to reacquire
ownership and control of Genuity or, at the least, subject it to losses due to delay in obtaining
section 271 approvals.
45. We find that the requirements that we adopt today with respect to providing
disaggregated data on the merged entity's provision of special access circuits and the showing of
nondiscriminatory access to unbundled loops required for the merged firm to demonstrate section
271 checklist compliance, will make any attempted discrimination in favor of Genuity in the
provision of these services highly detectable. To the extent that parties allege that the merged
firm could use its control over bottleneck assets to the detriment of Genuity's competitors in
other ways, such behavior may be readily apparent to the independent auditor, and, in any
event, parties are always free to file section 208 formal complaints alleging a violation of the
nondiscrimination provisions of the Act. Thus, we conclude that the detectability of
anticompetitive behavior, combined with the merged firm's incentive to obtain section 271
authority, will provide a potent deterrent to restrain the merged firm from acting on any incentive
to impede competition through the use of Bell Atlantic's bottleneck facilities. Accordingly, we
find that the ease in detecting discrimination on the merged firm's part in favor of Genuity serves
to decrease the likelihood that such discrimination will in fact occur.
46. We note that this conclusion is similar to Judge Greene's findings in Tel-Optik. In that
case, Judge Greene recognized the possibility that an acquisition of a conditional interest could
provide a BOC with "substantial incentive and ability unfairly to impede competition by use of its
monopoly position in the market it is thus entering." He concluded, however, that if the BOC
would attempt to use its monopoly position to disadvantage competitors, "that attempt would
almost certainly be made known to the Court during any subsequent waiver proceedings."
Similarly, in the instant case, the knowledge that discrimination would be detected either by the
independent auditor or in subsequent section 271 proceedings, and possibly deprive the BOC of
its ability to exercise the conversion right, reduces the likelihood that the merged entity will
engage in such behavior.
1. Control
47. As set forth below, we conclude that Bell Atlantic/GTE will not control Genuity.
We find that, under the Applicants' proposal, Bell Atlantic/GTE will not exercise de jure or de
facto control of Genuity prior to the potential conversion of its Class B shares. As an initial
matter, we find no evidence that, prior to any potential conversion, Bell Atlantic/GTE will have de
jure control, or voting control, of Genuity. We recognize that de facto control, or actual
control of a company, presents a closer question. As discussed below, having examined the
composition of the board and management, the minority shareholder protections, Genuity's
financing arrangements, the contractual relationship between the entities following the spin-off,
and other factors, we find that the merged firm will not have the power to dominate Genuity's
corporate affairs and, therefore, is not in actual control of Genuity. We note, however, that we
base our conclusion on representations made by the Applicants regarding the relationship between
the merged firm and Genuity after the spin-off. Should the actual relationship between Bell
Atlantic/GTE and Genuity deviate from or extend beyond those representations, the Commission
would be compelled to reevaluate its assessment of whether the merged firm controls Genuity. In
the event that the Commission finds that, in light of the changed circumstances, the merged firm
does, indeed, control Genuity, we will take appropriate enforcement action which may include
issuing a standstill order.
48. The determination as to whether an entity is in de facto, or actual, control of another
entity "transcends formulas, for it involves an issue of fact which must be resolved by the special
circumstances presented." Because the inquiry is inherently factual and not subject to a precise
formula, we must look at all relevant factors and the totality of the circumstances. In
ascertaining where actual control resides, "we are governed chiefly by the demonstration of [the
shareholder's] power to dominate the management of corporate affairs." Although the
percentage of voting stock held by a minority shareholder is relevant, the Commission also has
considered as important factors the right to elect members of the company's board of directors, to
determine the manner of operation, to make strategic decisions, and to control personnel and
financing decisions. The Commission has recognized that spin-off situations may warrant
greater flexibility in applying these factors.
49. Having reviewed these and other factors, both individually and cumulatively, below,
we are persuaded that Bell Atlantic/GTE would not exercise de facto control of Genuity. Prior to
any potential conversion of the Class B shares, the public shareholders will have 90 percent of the
voting rights, will elect twelve of the thirteen directors, and will have a potential right to acquire
Bell Atlantic/GTE's shares if the contingency is not satisfied. Nothing on the record undermines
the public shareholders' ability to manage and operate Genuity through this substantial voting
control and board participation. Consequently, as described below, the merged firm will not be in
a position to dominate the management of Genuity, or control its business decisions, personnel
practices or finances. Although we do not dispute that the merged firm may have limited
influence over Genuity, we find that this limited influence will not exceed the degree permitted by
section 3(1).
50. Voting Control. While control over an entity confers affiliate status under section
3(1), the structure of the statute implies that a limited degree of influence, short of control, is
permissible. This conclusion follows implicitly from section 3(1)'s recognition that a BOC may
hold up to ten percent of the stock in a prohibited entity. Our concern in section 3(1),
therefore, must be whether the entity holds de facto control, or exercises influence beyond the
implicit de minimis level permitted by the statute. Thus, the mere fact that Bell Atlantic/GTE will
be a 9.5-percent voting shareholder of Genuity, a widely held, publicly traded company, is not
dispositive of the locus of control. In fact, we note that under the proposal other entities may
exercise voting control twice that of Bell Atlantic/GTE.
51. Investor Safeguards. We find that the minority investor protections afforded to the
Class B shareholder or Bell Atlantic/GTE, as the case may be, are narrowly tailored and do not
rise to a level that would consistently inject the merged firm into Genuity's business and policy
decisions. Commission precedent recognizes that non-controlling shareholders have an
incentive to act to protect their investment and may influence the operation of a company.
Accordingly, the Commission has permitted minority shareholders "to wield significant influence,
including the ability to affect the outcome of votes or the day-to-day operations of a company, so
long as that influence does not rise to a consistent level of dominance at which the minority
shareholder is determining how the company runs and what business choices it makes."
Minority investor protections, for example, are commonly used to induce investment and ensure
that the basic interests of minority stockholders are protected. Accordingly, the Commission
has stated that "the right to vote on matters involving extraordinary corporate actions does not
ordinarily undermine the nonattributable character of otherwise non-cognizable interests, so long
as that right is narrowly circumscribed."
52. We find that the minority investor protections accorded to the Class B shareholders or
Bell Atlantic/GTE are narrowly tailored to protect the company's initial equity investment and its
potential right to convert the Class B shares upon satisfaction of the conditions. By leaving
room for Genuity's management to, for example, enter into acquisitions of up to 20 percent of
Genuity's fair market value without Bell Atlantic/GTE's consent, the safeguards do not enmesh
the merged firm in all major decisions regarding how the company runs it operations or what
business choices it makes. Moreover, through its veto rights, the merged firm cannot compel
Genuity's officers and directors to pursue any particular course of action. Instead, the merged
firm can only block, by withholding its consent, certain actions contemplated by Genuity's
management.
53. Officers and Directors. We find that the selection and composition of Genuity's
officers and directors do not evidence control of Genuity by the merged firm. In particular, we
note that the board structure is designed to minimize concern that GTE's initial selection of board
members will result in Bell Atlantic/GTE controlling Genuity or its board. As with other spin-off
situations, the initial board of Genuity has been selected by GTE, its former parent. In this case,
however, potential concern over board independence stemming from GTE's initial selection is
tempered by the fact that shortly after the IPO a majority of the directors will be individuals who
were not selected by GTE and who have no prior affiliation with either Bell Atlantic or GTE.
Specifically, within 90 days of the IPO, the four initial independent directors selected by GTE will
select seven other independent directors. As a further safeguard against any potential lack of
independence, rather than being locked in for specific multi-year terms, twelve directors (the four
selected by GTE plus the additional independent directors selected by those four, as well as the
Genuity CEO) will stand for election by the public shareholders within 9 months of the IPO. The
potential for board turnover substantially mitigates potential concern over the independence of the
initial board members.
54. Although we note that the Class B shareholder has the right to designate one board
member (who will refrain from voting until the board comprises at least 10 members), we do not
find that such designation grants the Class B shareholder control over Genuity or its board.
There will be a clear majority of board members with no interest in Bell Atlantic/GTE, and no
past association with either company. All of the directors, including the Class B designee, should
have every incentive, as well as a clear fiduciary duty, to serve only the best interests of Genuity,
regardless of whether this is also in the best interests of the merged firm. We note that the
proposal gives the directors the power and opportunity to carry out their fiduciary duties. Thus,
we find nothing on the record to doubt that the directors will act in strict accordance with their
clear fiduciary responsibility. This expectation similarly applies to those officers and managers
of Genuity who were previously employed by one of the merging parties.
55. We have carefully examined the impact of any prior relationship with the merging
parties upon the ability of Genuity's officers and directors to control major business and policy
decisions of the company. Because Genuity is being spun off from GTE, a number of initial
decisions affecting Genuity were made by GTE prior to the spin-off. We find, however, that these
decisions do not lock in Genuity's officers and directors to specified courses of action, but rather
are of a transitional nature and allow for the officers and directors to make independent business
decisions on a going-forward basis. We note that several members of Genuity's management
worked for Genuity's precursor, BBN, prior to its acquisition in 1997 by GTE, and thus have
experience with independently managing and growing an Internet backbone company.
56. Given the contingent nature of the conversion right, we also find that, to the extent the
existence of the Class B conversion right carries any degree of control in the eyes of Genuity's
officers and directors, any such control premium will be negligible. Genuity's management
undoubtedly will be cognizant of the conditional conversion right that carries with it a possibility
that Bell Atlantic/GTE will obtain control of the company at some point in the future.
Nonetheless, the merged firm will not have an absolute legal right to reacquire Genuity.
Genuity's officers and directors therefore cannot be certain that the merged firm will satisfy the
access line thresholds. Moreover, in the event that Bell Atlantic/GTE fails to meet the 95-percent
threshold, the public shareholders will have the right to purchase its shares in return for a debt
instrument. Thus, although the officers and directors will be aware of the possibility that Bell
Atlantic/GTE will reacquire the company, they also will recognize that the Class A shareholders
may ultimately retain full ownership of the company. This countervailing consideration weighs
against ascribing an influential degree of control to the mere existence of Bell Atlantic/GTE's
conditional conversion right.
57. Finances. We find that Bell Atlantic/GTE will not have control of Genuity's finances.
At the time of the spin-off, the proceeds of the IPO will represent the primary source of financing
for Genuity, and the spun-off entity will not be obligated to Bell Atlantic/GTE on any loan.
Genuity retains the right to seek additional funding through arm's-length loans from the merged
firm, but is not obligated to do so. If it does obtain loans from Bell Atlantic/GTE, these cannot
amount to more that 25 percent of the total outstanding debt of Genuity. Because Genuity is
under no obligation to obtain funding from the merged firm, and Bell Atlantic/GTE's ability to
loan money to Genuity is restricted in any event, we conclude that any potential financing
arrangements with the merged firm will not vest control of Genuity's finances in Bell
Atlantic/GTE. Indeed, as a public corporation, Genuity has the ability to issue additional shares
to finance some of its operational needs. In addition to examining the source of the funds, we
also assess whether the locus of Genuity's financing decisions remains with Genuity, and find that
it does. Although under the investor safeguards the merged firm's consent is required for Genuity
to issue debt in excess of $11 billion, we are persuaded that the size of this restriction leaves
sufficient room for Genuity to control major decisions regarding financing. Thus, we find that the
potential right to obtain arm's-length loans from the merged entity and the limited role of the
merged firm in approving debt beyond $11 billion do not vest control of Genuity's finances in Bell
Atlantic/GTE.
58. Commercial Contracts. We find that the contractual relationship between Bell
Atlantic/GTE and Genuity following the spin-off will not result in transferring day-to-day
operational control of Genuity to Bell Atlantic/GTE. By their nature, the administrative support
services contracts are transitional, limited to not more than one year, and expressly terminable by
Genuity without penalty at any time. We note also that the services provided by the former
parent do not appear to involve the merged firm in Genuity's core operations. Many of the
support services that are included in the contracts appear to be functions that are commonly
outsourced, such as billing, payroll services, benefits administration and processing, cash
processing, realty and leasing management, environmental and safety services and information
technology services. The merged firm will not, for example, have any role in hiring or firing
Genuity employees, in training employees, in strategic planning and business development, in legal
counsel and regulatory affairs support, and in advertising and other corporate communications.
We therefore find it reasonable in this case that the merged entity may continue to provide
narrowly-defined support services for a limited transitional period following the spin-off. Given
the transitional nature of these narrowly-defined support services, which will not entail Genuity's
core operations, we also conclude that Bell Atlantic/GTE will not be "providing" in-region,
interLATA services in violation of section 271 through these contractual relationships.
59. We further find that the joint marketing agreement between the merged firm and
Genuity does not confer control over Genuity. Although the Purchase, Resale and Marketing
Agreement has a five-year term and obligates Genuity to provide most favored customer pricing
to Bell Atlantic/GTE, the Agreement is not exclusive and does not apply to those states in which
the combined entity is prohibited from providing in-region, interLATA services. Genuity
therefore has the right to market, distribute and sell its services nationwide, either directly or
indirectly through other dealers or distributors, and according to the prices and volume or other
purchase discount arrangements that it desires to make available to its other customers. In
addition, we find that the agreement specifies that the prices for certain Genuity services will be
renegotiated annually, or even quarterly. Moreover, because the contract specifies that the
merged firm will not provide or jointly market in any state for which it has not obtained section
271 authority any Genuity service that is, or includes as a bundled component, an interLATA
service, we also conclude that Bell Atlantic/GTE will not be "providing" in-region, interLATA
services in violation of section 271 through the joint marketing agreement between the companies
following the spinoff.
60. EDP Distinctions. AT&T further suggests that various attribution rules under our
Cable Attribution Order and Broadcast Attribution Order are pertinent to the control analysis
and support a finding that Genuity would be an affiliate of the merged entities. We disagree.
Both the broadcast equity-debt plus (EDP) attribution rule and the cable equity plus debt rule
provide, in specific circumstances, for attribution of certain financial investments (including
options and warrants) when the investor holds an interest in excess of 33 percent of the total asset
value of the entity. These rules focus directly on those financial relationships in which there is
significant incentive and ability for the otherwise nonattributable interest holder to exert influence
over the core operations of the licensee. As we explained in the Broadcast Attribution Order,
"[t]he approach of focusing on specific triggering relationships would extend the Commission's
current recognition that the category or nature of the interest holder is important to whether an
interest should be attributed." A similar equity-debt rule arises under our Cable Attribution
Order. We stated in that Order that, in adopting the ED rule, "[w]e affirm our conclusion in the
Broadcast Attribution Order that there is the potential for certain substantial investors or
creditors to exert significant influence over key decisions, which may undermine the diversity of
voices we seek to promote." Therefore, reflecting our view that relationships that offer
potential for significant influence or control should be counted in applying the broadcast and cable
ownership rules, which promote diversity and competition, we adopted a targeted prophylactic,
structural rule under which we would make certain interests attributable using a bright line test.
61. That same range of concerns is absent here, where we are primarily focused upon the
competitive considerations underlying section 271, a provision that entails case-specific inquiry.
Accordingly, we decline to adopt in this proceeding any bright line test for assessing whether an
entity is an affiliate within the meaning of section 3(1). Instead, in this instance, we employ a
case-specific evaluation tailored to the circumstances now before us, which implicate section 271.
Thus, unlike the cable and broadcasting contexts, the specific policy concerns present here
persuade us that a case-specific evaluation will best effectuate the applicable statutory purposes.
62. Finally, a third application of the equity-debt rule arises under section 623 of the Act,
for which we have developed the LEC effective competition test. Under that test, effective
competition exists (sufficient to free rates of a cable operator from regulation) where a LEC or its
"affiliate" provides video programming services comparable to those of an unaffiliated cable
operator. In determining affiliation for these purposes, the Commission has used the ED rule:
"We believe that an ED investment, given its size, by a LEC gives an MVPD significant access to
the resources of a LEC such that it can be presumed that there is effective LEC competition [with
the cable operator]." The question here, however, was not whether or not the LEC would have
"control" over the related entity. Instead, our focus was different whether the related entity
would have sufficient support from the LEC and access to its resources, so that it could
effectively compete with the unaffiliated cable operator. That is a concern very specific to section
623 of the Act. As a result, the policy concerns driving that bright line test are inapplicable here.
1. Other Issues
a. Transfer of GTE Telecom Wholesale Services to Genuity
63. As part of our finding that the proposed spin-off of GTE's Internet backbone and
related assets will not result in a violation of section 271, we also approve the transfer of control
to Genuity of certain domestic and international section 214 authorizations and cable landing
licenses currently held by various GTE operating subsidiaries, including GTE Telecom.
Pursuant to domestic and international section 214 authorizations, GTE Telecom provides
domestic interexchange and international wholesale services. Although GTE Telecom will
divest its private line, point-to-point service to commercial and financial customers before closing
the merger, the Applicants maintain that the transfer of GTE Telecom's wholesale services is
necessary to preserve the integrity of Genuity's business. Because supplying private line
services on a wholesale basis to other carriers is integrally related to Genuity's business, we find
that the transfer of the authorizations associated with this business is in the public interest.
64. With respect to the international transfer, we modify the international section 214
authorizations that will be transferred to Genuity, and held by its international carrier subsidiary
GTE Telecom, to reclassify GTE Telecom as a nondominant international carrier on the U.S.-
Dominican Republic and U.S.-Venezuela routes. After the spin-off to Genuity, GTE Telecom
will no longer have an "affiliation," within the meaning of section 63.09 of the rules, with any
carrier that has market power on the foreign end of a U.S. international route. Accordingly,
pursuant to section 63.10(a)(1) of the rules, we find no basis in this record to regulate GTE
Telecom as a dominant international carrier to the Dominican Republic and Venezuela.
a. Waiver of Affiliate Transactions Rules
65. We also decline to grant the Applicants' request for a waiver of the affiliate
transactions rules. Specifically, the Applicants seek permission to effectively treat Genuity as
an affiliate for accounting purposes so that the merged firm's provision of services to Genuity
through a "separate services affiliate" would not alter the manner in which the separate services
affiliate provides service to other members of Bell Atlantic/GTE's corporate family. By
ensuring arm's length transactions between a dominant incumbent LEC and its nonregulated
affiliate, the affiliate transactions rules deter potential cost misallocations and protect ratepayers of
regulated services from bearing the costs of competitive ventures.
66. We deny the Applicants' waiver request for three reasons. First, the Applicants fail to
demonstrate special circumstances that warrant a waiver. Although they claim that the waiver
would only apply for a limited period of time, we note that, under the request, the separate
services affiliate would provide certain services for up to a year. Similarly, the Applicants do not
persuasively demonstrate that a waiver is necessary to ensure Genuity meets its operational
schedule. We note that the services at issue (e.g., human resources, accounting, real estate, and
billing and collection) are readily available on the open market so that denying the Applicants'
request does not prevent Genuity from obtaining these services in time for it to begin operations.
Second, granting a waiver could result in ratepayers of regulated services directly or indirectly
funding a portion of Genuity's start-up costs. Finally, granting the request could have some
bearing on our overall evaluation of Genuity's ownership and control. Our affiliate transactions
rules apply only to incumbent LECs and their affiliates, and not to unaffiliated entities like
Genuity. For these reasons, we conclude that waiving the affiliate transactions rules would be
inconsistent with our findings in this order. We note, however, that Bell Atlantic/GTE may
continue to provide such services, as long as it does so in accordance with all applicable
requirements.
LXVII. Analysis of potential public interest harms
A. Overview
68. In the 1996 Act, Congress determined that the public interest is served when
telecommunications markets are both more competitive and less regulated. In this Order, we
conclude that if considered without the supplemental conditions proposed by the Applicants, the
proposed merger threatens our ability to fulfill our statutory mandate in three respects. First, the
merger of Bell Atlantic and GTE decreases the potential for competition in local
telecommunications markets among large incumbent LECs. Second, the proposed merger
frustrates the ability of the Commission and state regulators to implement the market-opening
provisions of the 1996 Act through the use of comparative practices analyses, or "benchmarking,"
which can assist regulators in defining incumbent LEC obligations and implementing market-
opening policies under section 251, section 271, and state law in a less regulatory manner. Third,
the proposed merger would increase the incentives and ability of the merged entity to discriminate
against rivals in local, advanced services, and long distance markets. Specifically, we conclude
that the increase in the number of local calling areas controlled by Bell Atlantic as a result of the
merger will increase its incentive and ability to discriminate against carriers competing in retail
markets that depend upon access to Bell Atlantic's inputs in order to provide services.
Accordingly, as described below, absent the supplemental conditions proposed by the Applicants,
we would conclude that the proposed merger does not serve the public interest, convenience, or
necessity because it would inevitably slow progress in opening local telecommunications markets
to consumer-benefiting competition, thereby requiring us to engage in more regulation, which is
contrary to Congressional policy.
A. Loss of Competition Between Bell Atlantic and GTE in the Local Market
1. Background
69. We begin our review of the proposed merger by examining the transaction's likely
effects on interactions between the merging firms. Until 1996, carriers seeking to compete with
incumbent LECs in most geographic markets for local exchange and exchange access services had
been prevented or deterred from doing so due to legal, regulatory, economic, and operational
barriers. As in the SBC/Ameritech Order, we recognize that local telecommunications markets
are evolving into markets characterized by competitive conditions and, therefore, employ an
analysis that accounts for the transitional nature of those markets.
70. As explained in the WorldCom/MCI Order, our framework for analyzing transitional
markets reflects the values of, but does not attempt to replicate, the "actual potential competition"
doctrine established in antitrust case law. Under the actual potential competition doctrine, a
merger between an existing market participant and a firm that is not currently a market
participant, but that would have entered the market but for the merger, violates antitrust laws if
the market is concentrated and entry by the nonparticipant would have resulted in deconcentration
of the market or other pro-competitive effects. The transitional markets framework set forth in
the Bell Atlantic/NYNEX Order identifies as "most significant market participants" not only firms
that already dominate transitional markets, but also those that are most likely to enter in the near
future, in an effective manner, and on a large scale once a more competitive environment has been
established. The Commission seeks to determine whether either or both of the merging parties
are among a small number of these most significant market participants, in which case its
absorption by the merger could harm the public interest in violation of the Communications Act
unless offset by countervailing positive effects.
71. In this portion of the Order, we conduct an analysis of the probable competitive effects
of the merger of Bell Atlantic and GTE on the provision of local exchange and exchange access
services. We utilize the "transitional markets" analytical framework set forth in the Bell
Atlantic/NYNEX Order to determine whether the proposed merger would result in a potential
harm to the public interest by diminishing the potential for competition in local exchange and
exchange access markets in Bell Atlantic's or GTE's regions.
1. Discussion
a. Overview
72. We conclude that the proposed merger is likely to result in a public interest harm by
eliminating GTE as among the most significant potential participants in the mass market for local
exchange and exchange access services in Bell Atlantic's operating areas. Specifically, with
respect to the mass market for local services, we find that GTE is a most significant market
participant in Bell Atlantic service areas adjacent to and surrounding its GTE's service areas and
in which it has a cellular presence. We base this finding in part on our analysis of the plans of
GTE to expand out-of-region and, in particular, into Bell Atlantic's territories within Pennsylvania
and Virginia. We find that this elimination of GTE as a competitor in the mass market for these
services will result in a significant public interest harm. We also conclude that Bell Atlantic,
despite having the capabilities to be a most significant market participant in GTE's service area,
lacks the incentives to enter the mass market in GTE's territory. In the larger business market for
local exchange and exchange access services, we conclude that both Bell Atlantic and GTE are
only two of a larger number of most significant actual and potential competitors in each other's
service areas. The merger would thus be less likely to have adverse competitive effects leading to
public interest harms in these markets.
1. Relevant Markets
73. We begin our analysis of the proposed merger by defining the relevant product and
geographic markets. We then consider whether the merger frustrates the Communications
Act's goal of encouraging greater competition in those markets.
74. Product Markets. We analyze the competitive effects of the proposed merger on the
provision of local exchange and exchange access services. Defining relevant product markets
involves identifying and aggregating consumers with similar demand patterns. For purposes of
analyzing the competitive effects of this merger on local exchange and exchange access services
we identify two distinct relevant product markets: (1) residential consumers and small business
(mass market) and (2) medium-sized and large business customers (larger business market).
75. Geographic Markets. We conclude that the relevant geographic market in which to
measure the effects of this merger on local exchange and exchange access services consists of the
geographic markets for those services in which one or both of the merging parties provide
service. It is in these markets that the merging parties actually operate and where the potential
is greatest for both parties to operate in the future. In focusing our analysis upon these markets,
we recognize that the proposed merger can produce anticompetitive effects only in markets in
which both firms actually or potentially operate. Furthermore, as was the case in the
WorldCom/MCI Order, we conclude that, for purposes of this transaction, we need not conduct a
separate assessment of each local area in which Bell Atlantic and/or GTE have facilities to
determine whether there are potential anticompetitive effects.
a. Market Participants
76. When analyzing the probable effects of this merger on the relevant product and
geographic markets, we begin by identifying significant market participants. We first note that
Bell Atlantic and GTE remain dominant within their traditional service areas and therefore are
included in the list of most significant market participants within their respective traditional
markets. Next we consider whether, but for the merger, either of the merging parties would be a
significant potential competing provider of local exchange and exchange access services in the
other's markets. In doing so, we examine each of Bell Atlantic's and GTE's capabilities and
incentives to provide local exchange and exchange access services outside the region in which it is
an incumbent LEC, with particular emphasis on analyzing existing plans and any past attempts to
do so. We then examine other firms that may be considered most significant market participants
in the relevant markets to determine the competitive impact of the loss of one of the Applicants as
an independent entity.
77. We consider all available evidence indicating that precluded competitors possess the
capability to and would likely have entered the relevant markets. For instance, parties' plans or
attempts to enter the relevant markets represent probative evidence of each firm's own perception
that it possesses the capabilities and incentives necessary to be a significant market participant.
We similarly examine unsuccessful plans to enter a relevant market in the past. While recognizing
that a failed attempt could suggest that a firm is not a significant market participant, we would
also consider all relevant circumstances, including changed market conditions, that might facilitate
successful subsequent entry and the strategic business consequences to a firm of failing to enter
into a relevant market.
(i) Mass Market
78. With respect to the mass market for local exchange and exchange access services, we
conclude that Bell Atlantic and GTE each has the capabilities to be considered a significant
market participant in the other's operating areas. In addition, as major incumbent LECs, both
Bell Atlantic and GTE are equipped with advantages when expanding out-of-region that other
potential local service market entrants lack. GTE has had the incentive and intention to enter
portions of Bell Atlantic's region, and we therefore find that it is a most significant participant in
the mass market for local exchange and exchange access services in Bell Atlantic's region.
Because we find that Bell Atlantic lacks the incentives to enter GTE's region, however, we
conclude that it is not among the most significant potential participants in the mass market within
GTE's service area.
79. Capabilities and Incentives. We conclude that both Bell Atlantic and GTE have the
operational capabilities necessary to enter out-of-region markets. In general, as major incumbent
LECs, both have the requisite access to the necessary facilities, "know how," and operational
infrastructure such as customer care, billing, and related systems that are essential to the provision
of local exchange services to a broad base of residential and business customers. These systems
are required whether entry occurs through resale, use of UNEs, or some other form of facilities-
based entry. Similarly, Bell Atlantic and GTE also possess special expertise that they could bring
to the interconnection negotiation and arbitration process when entering out-of-region markets
because of their intimate knowledge of local telephone operations and experience negotiating
interconnection agreements with new entrants.
80. Moreover, as was the case in the merger of SBC and Ameritech, Bell Atlantic and
GTE have the additional advantage in Pennsylvania and Virginia of adjacent territories, a cellular
presence, or both. In Virginia, for instance, each of the areas served by GTE's incumbent LEC
is abutted by Bell Atlantic's territory. Additionally, GTE's substantial wireless presence in
Virginia is largely within Bell Atlantic's wireline territory. Each company has an array of
switches and switching locations that have capacity or can be readily upgraded to provide
switching to contiguous territories, and, in fact, GTE's own local entry strategy indicates its intent
to leverage upgraded wireless switches to provide wireline service to "near-franchise" areas.
Thus, in their contiguous service areas in Pennsylvania and Virginia, Bell Atlantic or GTE could
lease or build transport from their existing switches to a newly entered market more readily than
other potential local service providers because of their proximity to the newly entered market, as
well as their understanding of the requirements of providing local exchange services. In
addition, both Bell Atlantic and GTE have brand recognition in contiguous regions because of
extensive advertising in media markets that cross these regions, as well as nationally recognized
brand names resulting from extensive advertising campaigns. Finally, the wireless assets that
Bell Atlantic and GTE possess in Pennsylvania and Virginia also provide unique advantages for
out-of-region entry, for a wireless presence can provide a ready customer base for expanding into
wireline local telephony. As discussed below, this is indicated by GTE's own entry plans.
81. GTE's Out-of-Region Plans. In addition to having the capability to do so, we
conclude that GTE also possesses the incentives to be a most significant participant in the mass
market for local exchange and exchange access services in Bell Atlantic's region, particularly in
Pennsylvania and Virginia. By 1998, when it announced the proposed merger with Bell Atlantic,
GTE had entered and was providing service as a competitive LEC in the small business market for
local exchange and exchange access services in several states spread across the territories of each
Bell Operating Company (BOC) with the exception of Bell Atlantic. In those markets, GTE
offered local services through resale, as well as through utilization of proximate wireless switches
in certain places. As with many other competitive LECs that initially enter a market through
resale of the incumbent LEC's services, GTE's business plans indicate that it intended to convert
its resale activities into facilities-based services as its customer base expanded.
82. We find that, absent the merger, it is highly likely that GTE would have continued
entering local markets, including Bell Atlantic-controlled markets, and would have continued
converting its resale operations into facilities-based service. The fact that prior to the merger
announcement GTE had not begun offering local wireline services in Bell Atlantic's region does
not establish that it lacked the capabilities and incentives to do so. Rather, GTE's internal
documents indicate that it planned to continue expanding its local presence by offering services
through resale and by leveraging its existing facilities and wireless and long distance customer
bases to offer bundled service packages.
83. Both Bell Atlantic and GTE are incumbent LECs in substantial geographic areas
within Virginia and Pennsylvania. Internal GTE documents indicate that GTE had long-standing
plans to enter Bell Atlantic's local markets in each of these states. For instance, GTE's
competitive LEC had completed interconnection negotiations with Bell Atlantic and submitted
interconnection agreements to the Pennsylvania and Virginia state utility commissions for
approval. Significantly, GTE withdrew its request for approval of its interconnection
agreement with Bell Atlantic in Virginia the day before it filed its application for approval of the
merger with this Commission, further indicating that GTE would have expanded into Bell
Atlantic's Virginia market but for its merger with Bell Atlantic.
84. In addition to its significant presence in Virginia as an incumbent LEC, GTE has a
substantial wireless presence in Virginia, with several wireless switches from which it could offer
facilities-based local exchange and exchange access services in Bell Atlantic's region. Despite its
wireless presence in Pennsylvania being more limited, GTE's wireline presence throughout the
state would permit it to implement its competitive LEC's plans to enter adjacent "near-franchise"
areas. Although it appears that GTE's plans to enter Bell Atlantic's region suffered several delays
during 1998, documents created after the proposed merger was announced indicate that GTE had
not abandoned its plans to enter the local markets in either of these states. To the contrary, GTE
continued to have definite plans and articulated strategies for entering Bell Atlantic's local
markets in 1999. Accordingly, we conclude that GTE is a significant market participant in the
mass market for local exchange and exchange access service in Bell Atlantic's local markets in
Pennsylvania and Virginia.
85. In addition, GTE had long-term plans to expand into many additional states within Bell
Atlantic's region. Indeed, at the time of the announcement of the merger, in addition to
Pennsylvania and Virginia, GTE's competitive LEC had filed applications for certification as a
competitive LEC in Connecticut, Maryland, New Hampshire, New York, Rhode Island, and the
District of Columbia. Indeed, the Applicants' Supplemental Filing in this proceeding refers to
the investment by GTE's competitive LEC of "hundreds of millions [of dollars] in [operational]
support systems and other assets needed to compete outside its traditional local telephone service
areas."
86. We are unpersuaded by GTE's contentions that its competitive LEC was pursuing an
extremely limited out-of-region presence prior to the merger. Although GTE argues that its
competitive LEC's initial launch in California demonstrated stark differences between its business
plan and its actual commercial results, causing it to prepare to enter only one out-of-region city in
1999, GTE's internal documents indicate that it in fact planned to enter several additional
markets as a competitive LEC in 1999, including Bell Atlantic's incumbent LEC markets of
Pennsylvania and Virginia. Similarly, GTE's argument that its competitive LEC's entry plans
focused nearly exclusively on reselling its incumbent LEC's services to customers within its own
region is belied by the evidence indicating that GTE, in fact, intended to offer local services to
small businesses in several states in which its incumbent LEC has no presence.
87. Despite GTE's claims that its competitive LEC was considering canceling many of its
out-of-region entry plans because of problems experienced with its competitive LEC's entry into
the local market in California, it has presented no evidence to that effect. Rather, documents
dated after the announcement of GTE's merger with Bell Atlantic indicate that GTE had extensive
competitive local market entry activities planned for 1999. Moreover, whatever the merits of
GTE's reasons for allegedly scaling back its competitive LEC's activities, none of them is
described in contemporaneous documents as a reason for halting its plans for more extended
entry. Indeed, there is no indication that GTE would not have continued developing its resale
strategy, as well as its plans to begin offering facilities-based service, absent the announcement of
the merger with Bell Atlantic. We therefore conclude that GTE's extensive entry plans were
ultimately cancelled because it preferred to merge with Bell Atlantic rather than compete on its
own in the mass market for local exchange and exchange access services.
88. We similarly disagree with GTE that its entry into the mass market for local services
would have a limited impact on that market because its entry was resale-based. Relying on
resale operations is a typical initial entry strategy employed by competitive LECs. As we
recognized in the SBC/Ameritech Order, a competitor's entry by resale can be a necessary first
step to facilities-based competition, not a per se disavowal of it. Nor do we find credible
GTE's assertion that it lacks brand name recognition outside of its region. GTE operates in
twenty-eight states, offers long distance, wireless, local, and Internet services, and has a decidedly
national corporate focus. Moreover, we disagree with Applicants' contention that GTE has
limited name recognition in Pennsylvania and Virginia. Although GTE's brand recognition in
Pennsylvania and Virginia on a statewide basis may not approach that of the three largest
interexchange carriers that also provide local services, it is likely to be extremely high in the Bell
Atlantic areas adjacent to GTE's incumbent LEC operating areas simply because of advertising
spillover. In any case, GTE's brand recognition nonetheless is greater than that of other
competitive entrants due to its substantial presence in those states as an incumbent LEC and
wireless provider. Additionally, GTE retained the services of a national advertising agency to
begin implementing a national campaign to assist it with becoming a nationwide integrated
provider of local, long distance, wireless, and data products.
89. We also find that, despite having the capability to enter the out-of-region mass market
within GTE's service areas, Bell Atlantic lacked the incentive to enter that market. The record
does not indicate that Bell Atlantic had any specific or concrete plans to enter the mass market for
local exchange and exchange access services in GTE's service areas. Moreover, we note that
because it contains largely rural and less populated areas and contains few concentrated
geographic areas, GTE's local markets are not as attractive for entry as are those of Bell Atlantic.
Accordingly, we do not find that Bell Atlantic is a most significant market participant in GTE's
territory.
90. With respect to other significant market participants, we reaffirm our finding in prior
decisions that the three largest interexchange carriers, AT&T, MCI WorldCom, and Sprint are
among the most significant participants in the mass market for local exchange and exchange
access services. We find that each of these firms each has the capabilities, incentives, and stated
intentions to serve the mass market for local exchange services. Because each of these three firms
has a substantial base of residential customers of their long distance services and established brand
names resulting from their marketing of these services, they are among the best positioned to
provide local services to residential customers. Furthermore, their stated intentions to begin
serving the mass market for local services underscores their position as being among the most
significant competitors. Nevertheless, in certain regions, such as adjacent territories or cellular
markets, where incumbent LECs have brand name and/or customer base advantages similar to
those enjoyed by the interexchange carriers with their customers, incumbent LECs have the
additional advantage of their experience in providing local services to mass market customers as
incumbent LECs.
91. Finally, as in previous merger orders, we conclude that other firms currently serving or
planning to serve the mass market for local exchange and exchange access services out-of-region
are not yet included in the list of most significant market participants. Competitive LECs have
begun serving residential markets but do not yet have the existing customer base and brand name
that enable AT&T, MCI WorldCom, and Sprint, as well as certain incumbent LECs, to become
most significant competitors.
(i) Larger Business Market
92. We find that the larger business local exchange market has a number of market
participants with similar incentives and capabilities as an incumbent LEC expanding out-of-region.
As the Commission found in earlier orders, incumbent LECs still dominate the market for local
exchange and exchange access services sold to larger business customers in their regions and are
therefore most significant market participants. We recognize, however, that in contrast to the
relative lack of competition incumbent LECs face in the market for local services sold to mass
market customers, incumbent LECs face increasing competition from numerous new facilities-
based carriers in serving the larger business market.
93. Because the record demonstrates that Bell Atlantic undertook significant efforts to win
large business customers in GTE's region in Virginia, we conclude that Bell Atlantic is one of the
more significant market participant in the larger business market for local exchange and exchange
access services in GTE's service area. Similarly, GTE is likely to have pursued a number of its
large business customers in out-of-region states in Bell Atlantic's territory, as documented by
GTE's plans to offer local exchange services. Unlike in the mass market for local exchange and
exchange access services, however, a large number of other firms may have similar capabilities
and incentives expanding out-of-region to serve larger business customers. As we have noted
previously, the larger business market for local exchange and exchange access services differs
from the mass market. Larger business customers in general tend to be more sophisticated and
knowledgeable purchasers of telecommunications services than mass market customers.
Finally, broad-based brand name recognition and mass advertising are less important in attracting
larger business customers, and, as a result, many more firms are entering the larger business
market successfully than are entering the mass market for local exchange services.
a. Public Interest Analysis
94. Applying our analysis to the proposed transaction, we conclude that eliminating GTE
as an actual or potential participant in the mass market for local exchange and exchange access
services in Bell Atlantic's region, particularly in Pennsylvania and Virginia, results in a significant
public interest harm by frustrating the Communications Act's objective of fostering greater
competition in the markets for those services. More specifically, we find that the merger of Bell
Atlantic and GTE is likely to cause a significant public interest harm by reducing the level of
competition in the mass market for local exchange and exchange access services. One of the
major purposes of the Act is to lower the entry barriers that gave incumbent LECs monopoly
control over the local services offered to customers in their regions. The Act's goal is to
introduce competition in these markets to the ultimate benefit of customers, both as entrants
attempt to win consumers' business with lower prices and improved services and as incumbents
are forced in turn to respond to the entrants or lose customers. The potential for achieving these
goals is jeopardized if the incumbent and one of the most significant competitors in its region
choose to merge instead of compete. This is true even where the competitor has not entered the
market during the transitional period when entry barriers are being eliminated, for the merger will
eliminate future entry and any corresponding competitive restraint it would place on the
incumbent.
95. As discussed above, we base our conclusion on the following. First, until the merger
was negotiated, GTE was implementing plans to enter the mass market for local services in both
Pennsylvania and Virginia. Second, we conclude that GTE was among the most significant
potential competitors to Bell Atlantic in Pennsylvania and Virginia. We base this finding on our
determination that, as an incumbent LEC, GTE has the operational experience to be able to offer
local exchange services on a large scale in out-of-region markets. In addition, GTE has a number
of advantages for entering Bell Atlantic's territory in Pennsylvania and Virginia, including its
substantial wireless customer base, brand reputation, and adjacency to those regions. Additional
most significant potential market participants in the mass market for local services in Pennsylvania
and Virginia are limited to the major interexchange carriers that are able to capitalize on their
brand name and existing customer base. We thus conclude that the merger will eliminate GTE
as one of a very limited number of most significant market participants in the mass market for
local services in Pennsylvania and Virginia and, therefore, will result in a public interest harm.
96. Additionally, we further conclude that the proposed merger will likely result in the
elimination of GTE as a significant market participant in other states within Bell Atlantic's region.
As discussed above, the record indicates that GTE's competitive LEC had long-term plans to
expand its operations into many states in which Bell Atlantic is the incumbent LEC. In view of
the advantage of GTE's operational experience as both an incumbent LEC and a competitive
LEC, we find that GTE had the capabilities and incentives to further expand into the mass market
for local services in Bell Atlantic's region.
97. Accordingly, we conclude that the merger of Bell Atlantic and GTE results in the loss
of a most significant potential competitor in the provision of mass market local exchange services
in portions of Bell Atlantic's region, resulting in a potential public interest harm. The harm is
significant because GTE is among a very few firms that are able to enter a market dominated by
an entrenched monopolist that are equipped with genuine abilities to challenge that monopolist.
Without accompanying conditions, we therefore would be forced to conclude that the proposed
merger does not serve the public interest.
98. With respect to the provision of local exchange access services to larger business
customers, we conclude that, absent the merger, GTE is likely to have followed a number of its
large business customers in a number of out-of-region states in Bell Atlantic's territory, as
documented by GTE's plans to offer local exchange services. Additionally, Bell Atlantic had
demonstrated plans to win large business customers in GTE's service areas and would likely have
continued its plans absent the merger. At the same time, however, we also conclude that there
are a number of significant competitors equally competitive with Bell Atlantic and GTE in these
larger business markets. Therefore, although Bell Atlantic and GTE are significant market
participants, they are not among a limited number of most significant market participants.
Accordingly, we do not find that the merger will substantially frustrate the goals of the Act and by
reducing competition in the provision of local exchange and exchange access services to larger
business customers.
A. Comparative Practices Analysis
99. In this section, we analyze the effect of the proposed merger on the ability of
regulators and competitors to use comparative analyses of the practices of similarly situated
independent incumbent LECs to implement the Communications Act in an effective, yet minimally
intrusive manner. As the Commission explained in the SBC/ Ameritech Order, comparative
practices analyses, also referred to as "benchmarking," provide valuable information regarding the
incumbents' networks, operating practices and capabilities to regulators and competitors seeking,
in particular, to promote and enforce the market-opening measures required by the 1996 Act and
the rapid deployment of advanced services. Without the use of this tool, regulators would be
forced, contrary to the goals of the 1996 Act and similar state laws, to engage in less efficient,
more intrusive regulatory intervention in order to promote competition and secure quality service
at reasonable rates for customers. We find that the proposed merger of Bell Atlantic and GTE
would pose a significant harm to the public interest by severely handicapping the ability of
regulators and competitors to use comparative practices analysis as a critical, and minimally
intrusive, tool for achieving the objectives of the 1996 Act.
100. The Commission's public interest test considers, among other things, "whether the
merger. . .would otherwise frustrate our implementation or enforcement of the Communications
Act and federal communications policy." In previous incumbent LEC mergers, the Commission
has recognized that the declining number of independently-owned major incumbent LEC's limits
the effectiveness of benchmarking for regulators in carrying out the competitive goals of the
Communications Act in a less regulatory fashion. In the SBC/Ameritech Order, the
Commission concluded that by further reducing the number of major incumbent LEC's, the
merger increased the risk that the remaining firms will collude, either explicitly or tacitly, to
conceal information and hinder the benchmarking efforts of regulators and competitors.
Consequently, the Commission expressly noted that the SBC/Ameritech merger posed "a
significant harm to the public interest." The Commission stated that the SBC/Ameritech
"merger would result in dangerously few RBOC and major incumbent LEC benchmarks," and
posed "grave harms" to the regulatory processes and the operation of the 1996 Act's
interconnection requirements.
101. Following the concerns expressed in prior merger orders, we must consider the
effect that a further reduction in the number of large incumbent LEC's would have on the ability
of regulators and competitors to use comparative practices analyses as a deregulatory means to
advance the pro-competitive goals of the Communications Act. We find, as the Commission
concluded in the SBC/Ameritech Order, that the major incumbent LECs (RBOCs and GTE),
because they face similar statutory obligations and market conditions, remain uniquely valuable
benchmarks for assessing each other's performance. Thus, a reduction in the few remaining
major incumbent LECs would restrict the flow of information to regulators and competitors that
otherwise could be used to promote innovative and deregulatory market-opening solutions or to
identify and curtail unreasonable and discriminatory behavior that frustrates Congress' goal of
encouraging vibrant competition.
102. As discussed in greater detail below, we find that the proposed merger's
elimination of GTE and Bell Atlantic as separate independent major incumbent LECs, will
adversely impact the ability of this Commission, state regulators and competitors to use
comparative practices analyses to develop beneficial, pro-competitive deregulatory approaches to
open telecommunications markets to competition and to promote rapid deployment of advanced
services. More specifically, the loss of GTE and Bell Atlantic as separate independent sources of
comparative practices analysis, and the increased incentive for the merged entity to reduce
autonomy at the local operating company level, would severely restrict the diversity of practices
that regulators and competitors could observe and, where pro-competitive and less regulatory,
endorse. By further reducing the number of major incumbent LECs, the merger also increases the
risk that the remaining firms will collude, either explicitly or implicitly, to conceal information and
thereby hinder regulators' and competitors' ability to benchmark. We therefore conclude that
the proposed merger of Bell Atlantic and GTE would impede the ability of regulators and
competitors to effectively benchmark, precipitating more intrusive, more costly and less effective
regulatory schemes, contrary to the deregulatory aims of the 1996 Act and the interests of
regulated firms, consumers and taxpayers.
103. Our analysis of the effect on comparative practices analysis of the Bell
Atlantic/GTE merger is comprised of: (1) the need for comparative practices analyses to offset the
informational disadvantage of regulators and competitors; (2) the impact of a reduction in the
number of comparable firms on benchmarking's effectiveness; (3) the adverse impact of the
proposed Bell Atlantic/GTE merger on the effectiveness of benchmarking; and (4) the current
inadequacy of other alternatives to large incumbent LEC benchmarks.
1. Need for Comparative Practices Analyses
104. Comparative practices analyses of the practices and performances of similarly
situated incumbent LECs, yield a plethora of valuable information for regulators and competitors.
The 1996 Act requires regulators to oversee the opening of local telecommunications markets to
competition and to promote rapid deployment of advanced services under circumstances in which
regulators possess far less accurate and less complete information than incumbent LECs about the
capabilities and constraints of existing networks. Without such information, regulators and
competitors may not be able to make well informed decisions regarding the feasibility and costs of
certain interconnection or access arrangements, particularly when disputes arise over the
introduction of new technologies or services. The incumbent LEC's superior knowledge also
give it a tangible advantage over competitors in negotiating prices, terms, and conditions for
interconnection or network access.
105. In the SBC/Ameritech Order, we established the need for and importance of
comparative practices analyses. Absent the ability to benchmark among major independent
incumbent LECs, this Commission and state regulators would very likely have to engage in highly
intrusive and time consuming regulatory practices, such as investigating the challenged conduct
directly and at substantial cost to make an assessment regarding its feasibility or reasonableness.
The increased need for such direct regulation would not only be more costly, but would clash with
the deregulatory goals of the 1996 Act. Furthermore, these more intrusive, time consuming,
and costly regulatory alternatives are unlikely to be as effective as comparative practices analysis
in implementing the pro-competitive mandates of the 1996 Act, given the rapid evolution of
technology, the incumbent LECs' informational advantage and their incentive to conceal such
information.
1. Effect of Reduction in Number of Benchmarks
106. In order to devise a variety of policies and practices for regulators and competitors
to observe and analyze, comparative practices analysis requires a large number of comparable
independent sources of observation. For this reason, mergers between benchmark firms
significantly weaken the effectiveness of this pro-competitive, deregulatory tool. Removing a
benchmark firm through a merger reduces the independence of the sources of observation at three
levels: (a) the holding company level, as policies of each of the merging firms conflicts with the
other's; (b) the local operating company level, as the merged company's incentive to impose
uniform practices throughout its expanded region increases; and (c) the industry level, as the
incentives and capabilities of the few remaining major incumbent LECs to coordinate their
behavior increase. In addition, the loss of an independent incumbent LEC will have a greater
impact on reducing benchmarking's effectiveness the larger the region of the combined entity and
the smaller the number of similarly-situated firms remaining following the merger.
a. Effect at Holding Company Level
107. A merger of two large incumbent LECs obviously eliminates an independent
source of observation at the holding company level. The combined entity is unlikely to continue
with two sets of policies and practices where the dual policies conflict with one another. Instead,
it is likely to eliminate any divergent approaches in favor of a standard policy (which may
represent a choice between the two firms' positions, or a compromise). Consequently, as the
Commission explained in the Bell Atlantic/NYNEX Order, the result of the merger may be a
reduction in the level of experimentation and variety of approaches observable to regulators and
competitors.
108. When only a few similarly-situated benchmark firms remain, the harms to
benchmarking increase more than proportionately with each successive loss of a firm as an
independent source of observation. As the number of independent sources of observation
declines, there is less likelihood that one of these firms will emerge to undertake a strategic or
management decision that departs from the other incumbents, and that may establish a best
practice in the industry. Moreover, the observed best practice is likely to become worse simply
because there are fewer observations. Finally, as the number of independent sources of
observation decreases, deviations from average practices can be identified less confidently as
unreasonable and punishable.
109. Having a significant number of independent points of observation is especially
crucial for regulators and competitors in decisions regarding new services and innovative
technologies. Such decisions are likely to entail forecasting the expected benefits, costs, timing,
and problems associated with the provision, maintenance, and interconnection of such new
services and new technologies. Although it is impossible to make such predictions with certainty,
the existence of numerous major incumbent LECs increases the information available to regulators
in evaluating whether or when to require the offering and interconnection of the new service or
technology, and in setting interconnection standards, terms, conditions, and rates. Conversely,
having few major incumbent LECs to serve as independent points of observation can undermine
the credibility of such determinations.
a. Effect at Operating Company Level
110. A merger of two holding companies is likely to reduce the relative autonomy of
their local operating companies and hence the overall level of experimentation and diversity for
decisions that were made at the operating company level. This is because a holding company's
size increases, the cost it incurs when one of its operating companies' practices is used as a
benchmark against the rest of the company also increases. For example, if each of the merging
firms previously had five local operating companies, then each of these holding companies would
have been concerned only with the cost of adopting a benchmark practice for its four other
operating companies. Following the merger, however, the holding company would have to
consider the cost of adopting this benchmark practice for a total of nine other operating
companies. Accordingly, as a holding company acquires more operating companies and its
service region expands, it has an increased incentive to ensure that all of its operating companies'
policies are uniform and consistent with each other and with those of the holding company.
111. Where a merger creates an incumbent LEC of sufficient size to dominate the
setting of industry averages and standard practices, which are based on data from operating
companies, the merged firm acquires an incentive to impose uniform practices in order to
influence or set the de facto average benchmark. An incumbent LEC with few operating
companies, for example, may allow its local operating companies to set the non-recurring charge
(NRC) associated with cutting over a loop, because the data from its operating companies will
have negligible impact on the industry average. If, however, as a result of a merger, the holding
company controlled a large percentage of the nation's local loops, then it would have a strong
incentive to establish a uniform NRC in order to influence the industry average. The result
would be a loss of independent sources of observation for regulators and competitors seeking to
use comparative practices analyses, rather than intrusive and expensive regulation, to promote
competition and rapid deployment of advanced services.
a. Effect at Industry Level
112. A reduction in the number of independently owned major incumbent LECs as a
result of a merger increases the likelihood of coordination, either tacit or explicit, among the
remaining firms in the industry for the purposes of reducing the effectiveness of comparative
practices analyses. As general antitrust principles indicate, collusion is more likely to occur where
only a few participants comprise a market and entry is relatively difficult. This is due in part to
the fact that, with fewer firms, less potentially divergent interests must be accommodated by the
coordinated behavior. On the other hand, with a large number of competitors and low barriers to
entry, coordinated behavior is less likely.
113. In the context of comparative practices analysis, we expect that having fewer
benchmark firms would result in the remaining firms being better able to coordinate their
behavior. In this situation, the coordination of behavior could be designed not to raise price, but,
rather, to conceal information concerning operating practices (particularly concerning
interconnection), and strategic behavior (particularly dealing with nascent competitors) from
regulators, and thereby impede the development of a competitive, less regulatory market. Unlike
coordinated pricing activity, where each participant has a unilateral incentive to cheat on the
agreement in order to raise its profits, no such incentive to cheat exists with respect to an
agreement, tacit or explicit, to behave in a uniform way to conceal market-opening information
from a regulator.
114. By reducing the number of benchmark firms, and thereby simplifying coordination
of operational and strategic behavior, a merger between major incumbent LECs facilitates the
ability of the remaining firms to conceal information to thwart the effectiveness of
benchmarking. The remaining firms will find it easier to coordinate the withholding of certain
types of information and the elimination of divergent operational practices that regulators and
competitors could use in comparative practices analyses. For example, tacit coordination among
fewer major incumbent LECs may make it easier for the remaining firms to agree not to provide a
certain type of interconnection or access arrangement in order to prevent regulators and
competitors from concluding that such arrangement is technically and practically feasible because
another major incumbent is providing it. In this way, further consolidation among the major
incumbent LECs could severely curtail regulators' abilities to constrain any tacit or explicit
coordination by these incumbents to impede comparative practices analyses, especially as
regulators seek to open the incumbents' markets to competition.
1. Adverse Effects of Bell Atlantic/GTE Merger
115. We conclude that the merger of Bell Atlantic and GTE will have an adverse impact
on the ability of regulators and competitors to employ comparative practices analyses, which
ultimately would force regulators to substitute more intrusive, more costly, and less effective
methods of regulation to the detriment of the public interest. We now examine the merger's likely
impact upon the diversity of approaches among major incumbent LECs to comply with the
Communications Act and adopt market-opening measures (a) at the holding company level, (b) at
the local operating company level, and (c) at the industry level.
a. Loss of GTE as Independent Holding Company
116. We find that, with only five major incumbent LECs remaining today (the RBOCs
and GTE), the elimination of an independent source of observation impairs the ability of
regulators and competitors to use comparative practices analyses to facilitate implementation of
the Communications Act. Moreover, by reducing the number of major incumbent LECs, the
merger makes it less likely that deviations from the average benchmark will be identified
confidently as unreasonable and punishable.
117. We reject the Applicants' arguments that GTE's service areas are highly dispersed
and largely rural, thus differentiating GTE from Bell Atlantic for benchmarking purposes. As
an initial matter, we note that GTE has been selling many of its rural exchanges to other
independent local telephone companies. Thus, on a going forward basis, it appears that GTE's
service area is becoming increasingly less rural in nature. Similarly, we reject the Applicants'
contentions that "GTE's value as a benchmark for RBOCs is limited," and that the 1996 Act
has created a far greater number of benchmarks than the seven RBOCs created by the MFJ. As
we stated above and in license transfer proceedings associated with other RBOC mergers, the
major incumbent LECs (RBOCs and GTE), because they face similar statutory obligations and
market conditions, remain uniquely valuable benchmarks for assessing each other's
performance. Instead, we find that the dispersed nature of GTE's service area makes it much
more valuable as a benchmark, because it operates under a wide range of geographic, regulatory,
and economic conditions. Moreover, GTE owns about 11% of customer loops in the United
States, far more than any smaller independent LEC or competitive LEC, and comparable to the
other major incumbent LECs.
118. We also reject the Applicants' argument that the merger represents "but a small
loss in the effectiveness of one regulatory tool." This proposed merger cannot be evaluated in a
vacuum. Rather, it must be examined in the context of recent developments in the
telecommunications marketplace. Specifically, less than a year ago, the Commission concluded
that the SBC/Ameritech merger would remove "another independent source of experimentation
and diversity," and that regulators and competitors would lose the problem-solving
opportunities that flow from this diversity of approaches. The Bell Atlantic/GTE merger
exacerbates this problem by further diminishing our regulatory capabilities.
a. Loss of Independence of Operating Companies
119. We find that, although the actual number of operating companies may not diminish
following the merger of Bell Atlantic and GTE, the combined entity will have greater incentive to
unify the practices of these companies, resulting in an overall loss of independence at the
operating-company level, and in fewer independent points of observation for regulators and
competitors.
120. The merged firm also will have a greater incentive to coordinate decisions made at
the local operating company level in order to affect the outcome of average-practices
benchmarking. The merger of Bell Atlantic and GTE would create the largest incumbent LEC
controlling more than one-third of access lines nationwide. Because the merged firm would be
disproportionately large compared to other incumbent LECs, the aggregate data reported by it
will have a direct impact on the industry's average benchmarks. Thus, the merged firm will have
both the capability and incentive to skew its decisions in order to affect the average benchmark
strategically. Moreover, the merged firm's size could cause it to dominate the standards-setting
process and establish de facto standards that advantage itself and disadvantage potential
competitors or consumers. The proposed merger could thus seriously undermine the value of
average-practices benchmarking among incumbent LECs.
a. Increased Risk of Coordination Among Remaining Major
Incumbent LECs
121. The proposed merger, by reducing to four the number of major incumbent LECs,
increases the incentive and ability of the remaining incumbents to coordinate their behavior, either
explicitly or implicitly, to impede benchmarking, and to resist market-opening measures. As an
initial matter, the merger of Bell Atlantic and GTE reduces by one the number of independent
holding companies whose behavior must be coordinated, which simplifies the process of
coordination. Coordination requires that the incentives of all parties are aligned, and reducing
the number of companies reduces the number of incentives that must be aligned.
122. Reducing the number of firms also increases each firm's incentive to coordinate its
behavior to undermine regulatory processes. Specifically, the merged firm will have a greater
incentive to enter into tacit agreement with the remaining firms to convey minimal information to
regulators and/or competitors and to eliminate outlying policies and practices that could become
industry benchmarks. Moreover, the merger will create a demonstrably large incumbent LEC
that can act as an industry leader for collusive purposes.
123. As a result of Bell Atlantic's merger with GTE, the other major incumbent LECs
will also have more incentive to cooperate in attempts to impede comparative practices analysis.
Cooperative ventures, either explicit or implicit, involve the risk that one or more parties will
deviate from the cooperative behavior, thereby spoiling the venture. With the cooperation of
fewer firms necessary, the merger reduces the risk that a venture will fail. By reducing the
number of major incumbent LEC benchmark firms to four, each firm has more incentive to
cooperate and less unilateral incentive to break an implicit or explicit agreement to impede
benchmarking. Thus, the proposed merger will facilitate any attempts, especially implicit
attempts, to coordinate behavior to conceal forms of competitive deterrence from regulators and
competitors. The merger of Bell Atlantic and GTE therefore increases the incentive and
abilities of the merged firm and other incumbent LECs to cooperate in becoming less effective
benchmarks for regulators and competitors seeking to promote competitive entry and rapid
deployment of advanced services.
1. Continued Need for Major Incumbent LEC Benchmarks
124. Benchmarking among the large incumbent LECs will continue to be a crucial
market-opening tool as regulators and competitors carry out the objectives of the 1996 Act. We
find that the loss of GTE and Bell Atlantic as relevant independent benchmarks, and the creation
of a new merged entity, severely curtails the benchmarking ability of regulators and
competitors.
125. Comparative practices analyses are most effective when the firms under
observation are similarly situated, including the size of the firms relative to the size of the market.
With comparable firms e.g., in their customer base, access to capital, network configuration,
and the volume and type of demands from competitors regulators and competitors can establish
more effectively that approaches and rates adopted by one incumbent would be equally feasible
for other incumbents. Significant variation between the major incumbent LECs and the other
carriers cited by the Applicants preclude the use of the latter categories as alternative benchmarks
in evaluating the major incumbent LECs' compliance with their statutory obligations.
126. We agree with the broad principle that the methods of comparison may evolve
over the course of the transition to full competition in local markets. Nonetheless, we find an
acute present need for benchmarking to, among other tasks, facilitate implementation of the
market-opening measures of the 1996 Act and promote the rapid deployment of advanced
services. For these types of comparisons, we predict, as we did in the SBC/Ameritech Order,
that the high percentage of access lines nationwide controlled by the RBOCs and GTE will keep
them at the forefront in establishing benchmark rates, terms and conditions for an extended future
period.
a. Inadequacy of Other Firms As Benchmarks Against Major
Incumbent LECs
127. We reject the Applicants' contention that other types of firms serve as adequate
benchmarks to the major incumbent LECs. We are not persuaded that the presence of small
incumbent LECs and/or competitive LECs eliminate the need for regulators and competitors to
make direct comparisons among the RBOCs and GTE. The Applicants' arguments ignore vital
differences in the 1996 Act's treatment of large incumbent LECs, the RBOCs in particular, as
compared with other incumbents and competitive carriers. Equally important, structural and
operational differences between these carriers and the major incumbent LECs also make direct
comparisons between them inappropriate.
(i) Differences in Regulatory Treatment
128. We conclude that small incumbent LECs and competitive LECs cannot qualify as
adequate alternatives to the RBOCs and GTE as benchmarks for implementation of the core
market-opening provisions of the 1996 Act. The Applicants fail to explain how smaller incumbent
LECs or competitive LECs could substitute for major incumbent LECs in assessing compliance
with certain prominent provisions of the 1996 Act. At a minimum, both regulators and
competitors have a strong continuing need for separate comparative practices analyses among
major incumbent LECs in order to ensure compliance with the 1996 Act.
129. Equally important, we find a pivotal distinction between the section 251
obligations imposed on the major incumbent LECs versus those of competitive LECs. In contrast
to the major incumbent LECs that are subject to section 251(c)'s market-opening requirements,
many of the competitive carriers cited by the Applicants are not subject to full section 251(c)
obligations. First, by definition, competitive LECs do not fall within the 1996 Act's definition of
an "incumbent local exchange carrier" for the given service area, nor do such carriers own the
operative facilities for which interconnection and access is sought. Instead, competitive LECs
are subject to the lesser requirements of section 251(b) that are applicable to all LECs.
130. Second, many of the smaller incumbent LECs fall within section 251(f)'s
exemption from certain section 251(c) obligations for rural carriers. In the SBC/SNET Order,
for instance, we concluded that the proposed merger was not likely to adversely affect the public
interest in part, because SBC and SNET were not comparable in size. The Commission noted
that "SNET is substantially smaller than the 'first tier' LECs -- the BOCs and GTE -- and has long
been subject to different regulatory treatment." Here, both Bell Atlantic and GTE are among
the largest incumbent LECs, and thus are subject to the statutory obligations suitable to those
entities. We reiterate, therefore, our finding in SBC/Ameritech that regulators and competitors
are restricted largely to the class of large incumbent LECs, principally the RBOCs and GTE, in
making benchmark comparisons under section 251(c).
(i) Differences in Structure and Operation
131. We also find that crucial distinctions in structure and operation undermine the
value of using smaller incumbents and competitors as benchmarks for the RBOCs and GTE.
132. Small Incumbent LECs. We find that, because their service areas include fewer
large metropolitan areas and thus tend to be subject to less competitive entry and less demand for
budding advanced services, smaller incumbent LECs are not likely to provide useful benchmarks
for measuring the market-opening performance of major incumbent LECs. In contrast to the
smaller incumbents, the major incumbents, including GTE, often operate in markets characterized
by high population density or a large number of business lines, which generally are more attractive
to new entrants. The level of competitive activity in a given area can implicate the network
architecture or capability required of certain incumbent facilities such as OSS and physical
collocation. A small incumbent facing little demand for interconnection, collocation or facilities
for advanced services is less likely to have traffic levels or performance measurements that would
render meaningful comparisons with a large incumbent who must employ more sophisticated
management systems to meet greater demand. Moreover, different market structures may result
in different network configurations that limit the usefulness of comparisons. For example, the loop
costs of an urban/suburban major incumbent LEC, may not be comparable to those of a small rural
incumbent LEC with longer average loops or less densely concentrated customers. Finally, in
average-practices benchmarking, no small incumbent LEC could provide an adequate
counterpoint to the combined entity's control of one-third of the nation's access lines.
133. Competitive LECs. We are not persuaded that competitive LECs presently stand
as adequate firms with which to compare the market-opening performance of incumbents. The
Applicants' suggestion that competitive LECs can be used as suitable benchmarks for the large
incumbent LECs, defies the logic, structure, and reality of the 1996 Act. As discussed above,
a primary motivation behind benchmarking is to increase the level of information regarding the
incumbents' networks for competitors seeking access to those facilities, as well as for regulators.
Moreover, competitive LECs are pursuing numerous strategies using a variety of wireline and
wireless technologies, and their limited facilities are far from comparable to the millions of local
lines controlled by the RBOCs and GTE.
134. Despite arguing that competitive LECs can serve as interconnection benchmarks
by providing wholesale service to other competitive LECs, the Applicants provide no evidence
demonstrating that competitive LECs actually are serving as wholesale suppliers in such a way as
to generate useful comparisons for incumbent performance. Moreover, even if some competitive
LECs decide to act as wholesalers, their incentives are likely to differ considerably from those of
the incumbents. These new entrants' strategies are directed at expanding their reach and filling
their vacant capacity, whereas incumbent LECs are likely to focus first on protecting their
customer base from erosion by competitors. Competitive LECs cannot provide useful
benchmarking information for the detection of incumbents' subtle forms of resistance to market-
opening measures.
135. All of the foregoing factors suggest that comparisons between a major incumbent
LEC and a small incumbent or a competitive LEC are less likely to yield the kind of benefits that
would flow from comparisons among the RBOCs and GTE. In this regard, we note that the
Applicants fail to provide examples where a regulator or competitor has relied on the performance
of these claimed benchmark alternatives, as adequate benchmarks against an RBOC or GTE. We
therefore reiterate our conclusion that the large incumbent LECs, because they face relatively
similar market conditions, remain the principal sources of benchmarks for their own behavior.
a. Inadequacy of Parity Requirements
136. We are also not persuaded by the Applicants' argument that maintaining a large
number of major incumbent LECs as benchmarks is no longer necessary because, the relevant
benchmarks during the transition to competitive local markets are parity comparisons focusing on
how an incumbent LEC treats competitive LECs vis-…-vis itself. According to the Applicants,
"the key inquiry is not whether the BOC is treating competitors as well as another BOC, but
whether the BOC is treating competitors as well as it treats itself."
137. We certainly agree with the notion that an incumbent LEC's treatment of its retail
operations or its affiliates as compared with its treatment of competitors can provide useful
benchmarks for regulators and competitors. In certain contexts, such as detecting discriminatory
behavior in interconnection, provisioning, and maintenance, parity comparisons provide a useful,
and minimally intrusive, way to obtain information regarding an incumbent's performance. As
Sprint observes, however, implementation of a parity rule itself may require traditional
benchmarking between major incumbent LECs -- e.g., in setting mutually acceptable
performance standards to determine if an incumbent LEC has complied sufficiently with the parity
requirement.
138. While we agree that parity rules are valuable, we nonetheless find that parity
considerations cannot substitute for all forms of benchmarking. Parity rules will not serve the
public and protect competition if, for example, an incumbent LEC deems it profitable to provide
lackluster service or charge excessive rates to both its own retail affiliates and its competitors.
For example, without discriminating, the incumbent LEC may profit from imposing high loop
charges, or access charges, on both its affiliates and its competitors, because the charges to its
affiliates constitute only an internal transfer. While parity requirements attempt to level the
playing field, therefore, traditional comparative practices analyses remain necessary to ensure that
this level does not sink below an acceptable standard. Moreover, parity rules will not always
suffice for innovative entrants. Exclusive reliance on parity rules, for example, could slow the
provision of innovative services to the public.
139. For the foregoing reasons, we conclude that parity rules complement, but do not
supplant, the use of traditional comparative practices analyses by regulators and competitors.
Indeed, if parity alone mattered, as the Applicants' analysis suggests, then all the remaining major
incumbent LECs would be permitted to merge into one entity, leaving regulators and competitors
unable to compare distinct practices of several independently-owned firms.
a. Sufficiency of Remaining Benchmarks
140. We find that the merger would result in dangerously few major incumbent LEC
benchmarks. As BlueStar, DSLNET, KMC and MGC note in their joint comments, after this
merger, "there will be three giant carriers controlling 90% or more of the nation's access lines."
141. With technical feasibility concerns, in particular, the loss of one source of
observation could in fact eliminate the single observation that would have proven a particular
arrangement feasible. This is especially true in making assessments regarding advanced
services, where the major incumbent LEC benchmark firms have taken different strategies or are
in different stages in terms of their own deployment or cooperation with others. Thus, reducing
the number of potential benchmark firms increases the chance that regulators and competitors will
lose the ability to observe the decisive benchmark.
142. Although we do not view the instant merger's reduction of the number of major
incumbent LECs (the RBOCs and GTE) from five to four to be a presumptive trigger of
benchmarking harms, we cautioned in the SBC/Ameritech and Bell Atlantic/NYNEX Orders, that
these harms increase disproportionately with each additional decline in the number of major
incumbent LECs. As explained above, along with further restricting diversity, each successive
reduction in benchmark firms exponentially increases the risk that the remaining firms could
successfully coordinate behavior, implicitly or explicitly, to reduce the effectiveness of
comparative practices analyses. As the number of benchmarks decrease, the greater the
likelihood the Commission must use increasingly intrusive and burdensome regulation to oversee
the transition to competitive local markets. As such, each successive pair of major incumbent
LEC applicants have a greater burden than the previous incumbent LEC applicants to demonstrate
their merger serves the public interest. For example, a merger that reduced the number of major
incumbent LECs from four to three would so severely diminish the Commission's ability to
benchmark that it is difficult to imagine that any potential public interest benefit could outweigh
such a harm.
1. Conclusion
143. We conclude that, by further reducing the number of separately-owned large
incumbent LECs, the proposed merger of Bell Atlantic and GTE would significantly harm the
ability of regulators and competitors to rely on comparative practices analyses to carry out their
obligations under the Communications Act. The Commission warned in the Bell Atlantic/NYNEX
Order, and reiterated in the SBC/Ameritech Order that "future applicants bear an additional
burden in establishing that a proposed merger will, on balance, be pro-competitive and therefore
serve the public interest, convenience and necessity." Bell Atlantic and GTE have not
overcome that burden.
144. In particular, the proposed merger of Bell Atlantic and GTE poses a significant
potential harm to the public interest by: (1) removing a source of potential diversity from
independent major incumbent LECs during the transition to competition; (2) creating an incentive
for the combined firm to coordinate behavior at the operating company level, thereby reducing
other potential sources of innovation; and (3) increasing the incentive and opportunity for
collusion and concealment of information among the few remaining major incumbent LECs.
A. Increased Discrimination
1. Overview
145. In the preceding section, we explained why this merger would seriously weaken
oversight of the Applicants' behavior toward competitors, thus frustrating the Commission's
ability to achieve two of the key public interest goals of the Telecommunications Act: increased
competition and reduced regulation. In this section, we conclude that incumbent LECs, such as
Bell Atlantic and GTE, have the incentive and ability to discriminate against competitors in the
provision of advanced services, interexchange services, and circuit-switched local exchange
services, and that such incentive and ability will increase as a result of the merger. This
increased incentive and ability to discriminate potentially creates a public interest harm because it
may adversely affect national competitors' provision of services, and may force consumers to pay
more for retail services, with reduced quality and choice.
146. We believe the merger may have particularly harmful, discriminatory effects on
competition in the provision of new types of advanced services. Advanced services
technologies and markets are still emerging and developing. To maintain the growth of this
nascent industry, we must continue to ensure competition in the provision of advanced services.
Therefore, we scrutinize carefully the possibility of an increase in incentive and ability to
discriminate against competitive providers of such services. The information gleaned from this
scrutiny informs the Commission, furthers its' efforts to encourage innovation and investment in
advanced services, and comports with the Commission's obligations under section 706 to
"encourage the deployment on a reasonable and timely basis of advanced telecommunications
capability to all Americans."
147. As in the SBC-Ameritech merger proceeding, we are concerned with the effects of
discrimination on competition in the provision of interexchange services and local exchange
services. Specifically, we conclude that the combined entity likely will discriminate to a greater
extent against termination of interexchange calls by competing providers in the combined region,
as well as against competitive LECs seeking to provide local exchange services in the combined
region. With respect to local exchange competition, we believe that the likelihood of increased
harmful discrimination is particularly acute with respect to competitive providers of local
exchange services to mass market customers (smaller businesses and residential customers).
148. Incumbent LECs in general have both the incentive and ability to discriminate
against competitors in incumbent LECs' retail markets. This incentive exists in all retail markets
in which they participate. Incumbent LECs' ability to discriminate against retail rivals stems from
their monopoly control over key inputs that rivals need in order to offer retail services.
149. In many cases, discriminatory conduct by an incumbent LEC in its region affects
competitors in areas both inside and outside the incumbent's region. The resulting effects on
competitors, externalities or "spillover" effects, can directly or indirectly harm customers,
whose business the incumbent LEC is seeking to gain. Spillover effects directly harm customers
when the incumbent LEC's discrimination in one region negatively affects a customer's
communications between that region and another region. Spillover effects indirectly harm
customers when an incumbent LEC's discrimination in one region increases a national rival's
general costs, thereby indirectly impairing the ability of this rival to provide service to customers
in other regions. Regardless of the nature of the spillover effects, the intended result is to
reduce the ability of competitors to acquire and/or keep customers.
150. Because after the merger the larger combined entity would realize more of the
gains from such external effects, the marginal benefit and corresponding incentive to discriminate
in each area would increase. As a result, the level of discrimination engaged in by the combined
entity in each region within the combined territory would be greater than the sum of the level of
discrimination engaged in by the two individual companies in their own, separate regions, absent
the merger. Specifically, the combined entity will be better able to discriminate against
competitors by coordinating its formerly separate local exchange operations and controlling both
ends of a higher percentage of calls, which is relevant to the provision of interexchange
services. As described above, regulators will have greater difficulty monitoring and detecting
this misconduct because of the reduction in the number of benchmarks. Therefore, the
combined company not only will have more incentive to discriminate against rivals, but also will
have a heightened ability to inhibit competitors' provision of services within the combined region
compared with the ability of each company currently to discriminate within its region. We
explain below why the combined entity is likely to increase the level of discrimination that rivals
must overcome to provide retail advanced services, interexchange services, and local exchange
services.
1. Analysis
a. Advanced Services
151. Although the Commission issues rules to prevent discrimination, it is impossible
for the Commission to foresee every possible type of discrimination, especially with evolving
technologies. Within the past year, the Commission has adopted rules, most notably the UNE
Remand Order, and the Line Sharing Order, that should enhance competition by reducing the
ability of an incumbent LEC to discriminate in the provision of advanced services. It is too
early for the Commission to discern the impact of these rules. Moreover, the advanced services
market is still a nascent industry. Accordingly, we find that despite certain changes in the
regulatory landscape, the increased discrimination theory we enunciated in the SBC/Ameritech
Order still holds true today.
(i) Background
152. One of the fundamental goals of the 1996 Act is to promote innovation and
investment by all participants in the telecommunications marketplace, in order to stimulate
competition for all services, including advanced services. Today, both incumbent LECs and
new entrants are developing and deploying innovative new technologies to meet the ever-
increasing demand for high-speed, high-capacity advanced services. For the advanced services
market to develop in a robust fashion, it is critical that the marketplace for these services be
conducive to investment, innovation, and meeting the needs of consumers. Moreover, we are
required by section 706 to be particularly vigilant that a merger between two incumbent LECs
such as Bell Atlantic and GTE will not harm the development of competition for such advanced
services.
(i) Incentive and Ability to Discriminate
153. We find that incumbent LECs such as Bell Atlantic and GTE have ample ability
and incentive to discriminate against advanced services providers, and that the increase in the
incentive and ability to discriminate may frustrate substantially the realization of the 1996 Act's
and the Commission's goals to encourage the deployment of advanced services. Specifically, we
find that the combined entity will have an increased incentive and ability to discriminate against
competitors providing retail services that rely on new technology, particularly advanced services
like Sprint ION. Because incumbent LECs either currently do, or in the future will, compete
with other providers of advanced services, they have an incentive to discriminate against
companies that depend on the incumbents' for evolving types of interconnection and access
arrangements necessary to provide new services to consumers. They also have the incentive to
limit or control the development of new services, to the extent new services compete with their
current offerings. In addition, competitors often are totally dependent on incumbent LECs for
last mile wireline access to end users.
154. We note that in some cases, the incumbent's control over the loop may give it the
ability to tailor the loop to any collocated or attached electronics, thereby forcing competitors to
provide service identical to the incumbent's. Specifically, by choosing electronics that meet the
incumbent's market need, without regard to that of its competitors, the incumbent may stifle
competitors' ability to innovate. Discrimination against competitors wishing to innovate and
deploy technology different than that deployed by the incumbent LEC often is not easily detected
by regulators.
(i) Post-Merger Incentive and Ability to Discriminate
155. We find that the instant merger, like the SBC/Ameritech merger, increases the
ability and incentive of the merged entity to discriminate against the providers of advanced
services. We agree with Sprint that there are spillover effects to discrimination against national
providers of advanced services, and that, post-merger, the combined entity would internalize
external effects to some extent, thus increasing its incentive to act in one area in a manner that
produces these effects in another area. Economies of scale and scope, and network effects
imply that when incumbent LECs weaken a competitive service in one region, this weakens it in
other regions as well. For services with "multi-market dependence," discrimination in one
market will have a ripple effect in other markets. We are specifically concerned that the
merger's large footprint will create more incentives for the merged entity to discriminate against
competitors whose networks become more attractive with more customers.
156. After the merger, the combined company will be able internalize these external
effects of discriminatory conduct in one area in the combined region on another area in that
region. By capitalizing on its monopoly control over loops, for instance, the combined entity
can discriminate against an advanced services provider entering an area in the combined region.
This will reduce the customer base and revenues of the advanced services provider, thereby
reducing its ability to enter another region. Because of the possibility of internalizing such
spillover effects, the incentive for the combined entity to discriminate against competitors
providing retail advanced services in particular areas within the combined region will be greater
than the sum of the incentives for the companies operating alone.
157. As we stated in the SBC/Ameritech proceeding, we are particularly concerned
about discrimination in the advanced services market, given the Commission's obligations under
section 706 to "encourage the deployment on a reasonable and timely basis of advanced
telecommunications capability to all Americans." In the advanced services market, there is a
continuing shift from a circuit switched to a packet switched environment, combined with the
emergence of data LECs such as Rhythms and Covad, that are using advanced technologies to
provide innovative new services. Any discrimination against these competitors will likely cause
a significant setback to current and future efforts to encourage competition and innovation.
a. Long Distance Services
158. In this section, we examine potential effects of the merger on the provision of
interexchange services. Commenters allege that discrimination may take two forms: price and
non-price. We examine these cases separately and conclude that the merged firm's increased
incentive and ability to engage in non-price discrimination will harm competition in the provision
of interexchange services, and, therefore, consumers of such services. With respect to price
discrimination, specifically discrimination through a price squeeze, we conclude that there are
adequate safeguards in place to guard against such conduct.
(i) Non-Price Discrimination
159. Bell Atlantic has satisfied the requirements of Section 271 in New York, and is
offering long distance services to its customers there. GTE has been in the long distance
market since 1996. As Bell Atlantic is authorized to enter the long distance market in other states
in its region, the merged entity will increasingly view interexchange carriers as retail competitors,
not only as access customers. This will give the merged firm incentives to deny, delay, or
degrade access service to interexchange carrier competitors. Because the merged entity will
control more than one-third of all customers lines nationwide, we must examine carefully the
claim that the merged firm will gain an increased ability to harm its interexchange rivals.
(a) Incentive and Ability to Discriminate
160. For the reasons discussed below, we conclude that the merged entity has the
incentive and ability to discriminate against competing interexchange carriers. Specifically,
given their monopoly control over exchange access services, each Applicant currently has the
ability to discriminate against rivals providing interexchange services, in favor of its own
interexchange operations, by denying, degrading, or delaying access on the originating and
terminating ends. We focus our discussion on discrimination with respect to the potential for
terminating access, because we find that the merged entity's incentive to engage in this type of
discrimination will increase significantly as a result of the merger.
161. As we found in the SBC/Ameritech Order, recent developments in local networks
have enhanced incumbents' ability to discriminate operationally and technically in favor of their
long distance affiliates, in particular with respect to larger business customers. The specific
developments in the local network that have enhanced incumbents' ability to discriminate against
rival interexchange providers that need different and generally more complex forms of network
interconnection are: (1) the deployment of common channel signaling systems; (2) the
development of advanced intelligent networks (AIN), or software driven networks; and (3)
further developments in multi-media applications (such as applications involving combinations of
voice, data, image, and video traffic). Incumbents may discriminate against interexchange
carriers by, among other things: (1) refusing to provide interconnection at critical points in their
intelligent network based on alleged harm to the network or refusing to convey certain types of
control messages across the AIN; or (2) "slow rolling" their competitors who make requests for
interconnection or technical information.
162. We conclude that the ability for Bell Atlantic and GTE to discriminate will be
greatest for customized or advanced interexchange access services for which detection of
discrimination is most difficult. Greater network complexity, a paucity of operational
experience and objective performance benchmarks, and the possibility of new types of
discrimination, increase the difficulty of detecting discrimination. In such a situation, past
experience with the interconnection of plain vanilla, or POTS service, becomes increasingly less
useful as a regulatory tool for preventing, detecting, and remedying discrimination.
(a) Post-Merger Incentive and Ability to
Discriminate
163. We agree with Sprint that, as a result of the merger, the combined entity will have
a greater incentive to discriminate in providing termination of in-region calls than either individual
company would have absent the merger. After the merger, the combined entity can realize the
benefits of discrimination against competing carriers on in-region calls on the terminating end, by
making it more likely that a customer on the originating end would choose the combined entity for
interexchange services. End users will be less likely to choose a competing carrier at the
originating end whose service does not appear as good as the incumbent's service that is free from
terminating problems.
164. We therefore agree with parties arguing that, with respect to interexchange calls,
the merged firm will have an increased incentive to discriminate in terminating the calls of
competing interexchange carriers, stemming from the fact that benefits will flow from controlling
both ends of a higher percentage of interexchange calls. According to Sprint, the combined
Bell Atlantic/GTE entity would terminate 43 percent of minutes that the combined entity controls
on the originating end, a 20 percent increase from the 36 percent weighted average of minutes
controlled cumulatively by the companies. Applicants assert that this increase "is no greater an
increase than in the SBC/[Pacific] Telesis merger, where the Commission found that an increase
of 'only six to seven percentage points' did not pose any anticompetitive risk." As we stated in
the SBC/Ameritech Order, the Commission reached a different conclusion in the SBC/Pacific
Telesis Order, where it stated that there was no anticompetitive risk from the increase in the
percentage of minutes for which the combined entity would control both the originating and
terminating end. Here, the harm would be significant because of the substantial number of
customers that will be affected by the discrimination made possible by the increase in the
percentage of interLATA traffic originating and terminating in Bell Atlantic's and GTE's
regions. We therefore agree with MCI WorldCom that, because interexchange carriers would
be more dependent on a single entity for exchange access than they would absent the merger,
hard-to-detect methods of non-price discrimination would be even more crippling to competing
long distance companies.
165. We further agree with MCI WorldCom that the ability to engage in less detectable
and more significant non-price discrimination would be greatly enhanced by the merger. For
the same reasons discussed above with respect to advanced services, we conclude that, as a result
of the merger, the ability to discriminate against rivals in the termination of interexchange calls
will be enhanced.
166. We recognize that the Commission concluded in the Bell Atlantic/NYNEX Order
that given existing safeguards, the merger between Bell Atlantic and NYNEX would not result in
an increased incentive and ability to engage in non-price discrimination against long distance
competitors. We note, however, that in the Bell Atlantic/NYNEX Order, the Commission did
not specifically address the issue of discrimination on the terminating end of long distance calls, an
issue that is significant here. We find that the larger scale of the instant merger as compared to
that merger, however, increases the risks of non-price discrimination.
167. This merger, like the SBC/Ameritech merger before it, continues a trend of
coalescing large incumbent LECs, and reversing the breakup of the Bell System. The old Bell
system, with its large footprint, made it difficult for rivals to obtain access to necessary inputs,
thus prompting its ultimate breakup. This merger brings GTE into the old Bell footprint for the
first time, and will result in a large footprint that would take another big step toward recreating
the Bell System, whose discrimination against interexchange carriers led to divestiture in the first
place.
(i) Price Discrimination (Price Squeeze)
168. In addition to non-price discrimination, opponents of the proposed merger have
raised arguments about a particular form of strategic pricing involving the Applicants' leveraging
monopoly control over bottleneck local loop facilities to inhibit competition from long distance
rivals. For example, MCI WorldCom argues that once the combined entity begins selling in-
region long distance service through an interexchange affiliate, it will take advantage of the "high"
prices for interstate exchange access services (above cost prices), over which it has monopoly
power (albeit constrained by regulation), by offering "low" prices for retail long distance services
in competition with the other long distance carriers, thereby setting up a price squeeze.
Because interstate exchange access services are a necessary input for long distance services,
opponents argue that the relationship between the combined entity's "high" exchange access prices
and its affiliate's "low" prices for long distance services forces competing long distance carriers
either to lose money or to lose customers even if they are more efficient than the combined
entity's long distance affiliate at providing long distance services. For the reasons discussed
below, we conclude that price squeeze tactics are likely to fail under the circumstances presented
here.
169. We conclude that because Bell Atlantic and GTE, either currently, or, in the future
will, compete with interexchange carriers for the provision of interexchange services, the merged
entity has the incentive to discriminate against these carriers through a price squeeze. We also
conclude that the combined entity will have a greater incentive to discriminate against the
termination of calls through a price squeeze than either individual company would have absent the
merger.
170. We find, however, that, given the existing regulatory safeguards, the merged entity
does not have significant ability to act on this incentive. Although we do not wish to rely on
regulatory safeguards to prevent potential public interest harms, we note here that certain
safeguards mitigate against harms in this circumstance. In the Access Charge Reform Order, the
Commission addressed the contention that an incumbent's interexchange affiliate could implement
a price squeeze once the incumbent began offering in-region, interexchange toll services, and
concluded that, although an incumbent LEC's control of exchange and exchange access facilities
may give it the incentive and ability to engage in a price squeeze, the Commission has in place
adequate safeguards against such conduct. The Commission determined in that order that the
existence of price caps reduces the ability to raise prices on access. We also note that, because
it is relatively easy to compare an incumbent LEC's access charges with its own retail prices, price
discrimination is relatively easy for the Commission and others to detect, and therefore, is unlikely
to occur. Moreover, important non-regulatory safeguards exist. For example, as the
Commission noted in the AT&T/TCI Order, the presence of extensive sunk facilities in both the
local and interexchange markets suggests that the merged firm would be unable to successfully
raise prices if any competitors were driven out of the market by the price squeeze. Thus,
because existing regulatory and non-regulatory safeguards greatly reduce the ability of incumbent
LECs, to engage in a price squeeze, we conclude that there is no substantial probable public
interest harm resulting from the increased incentive that Bell Atlantic and GTE may have to
discriminate against the termination of calls through a price squeeze as a result of the merger.
a. Circuit-Switched Local Exchange Services
171. For the reasons discussed below, we conclude that the merger will increase the
combined entity's incentive and ability to discriminate against competitive LECs seeking to
provide local exchange services in the combined region. We believe that this increased
discrimination particularly will be aimed at, and harmful to, competitive providers of local
exchange services to mass market customers (smaller businesses and residential customers).
172. We also note that the local exchange market is just that, a local market. For the
most part, companies competing with the incumbent LEC in the provision of retail local exchange
service compete on a local basis, and focus on a particular area or region. For other
competitive LECs, however, competing for local exchange service transcends local areas and
takes a more national scope. For such nationally competitive LECs, reputation, scale and
scope, and technology are significant for their national strategy; a company's reputation in one
region may affect its reputation in another region, and experience it gains with a new technology
in one region may help it in another region. It is this group of local exchange service
competitors with a national scope, with which we are especially concerned.
(i) Incentive and Ability to Discriminate
173. Because incumbent LECs compete with competitive LECs for the provision of
retail local exchange services, incumbent LECs have the incentive to discriminate against
competitive LECs that depend on the incumbents' inputs (such as interconnection and UNEs) to
compete. We find that a discriminatory interconnection policy will be profitable for an
incumbent LEC insofar as its revenue gains in the provision of retail local exchange services
exceed whatever revenues it forgoes from wholesale interconnection with rivals.
174. Incumbent LECs' control over access to interconnection and other essential inputs
gives them the ability to discriminate against rivals providing local exchange services. According
to Sprint, incumbent LECs can discriminate against rival local carriers either by raising the price
of interconnection charged to rivals (price discrimination) or by impairing their access to
interconnection and other essential inputs. We agree with Sprint that, because interconnection
prices are subject to regulatory oversight, an incumbent's ability successfully to engage in price
discrimination against competitive LECs seeking to enter its region is significantly weaker than its
ability successfully to engage in non-price discrimination. As evidence of incumbents' ability to
engage in non-price discrimination against rival competitive LECs, MCI WorldCom asserts, for
example, that Bell Atlantic has failed to comply with conditions imposed by the Commission in
connection with the BA/NYNEX merger; and that Bell Atlantic and GTE have: (1) failed to
meet their obligations under section 251 to provide unbundled access to xDSL-capable loops and
collocation on reasonable and nondiscriminatory terms; and (2) generally been "effective and
obdurate" foes of local competition.
175. Discrimination against competitive providers of local exchange services is more
likely to occur in conjunction with services to mass market customers as opposed to larger
business customers, because competitors serving larger business customers generally possess
more experience dealing with incumbents for provision of such services. Moreover,
competitive providers to business customers are better able to absorb the costs imposed by non-
price discrimination, because they have a greater profit margin than providers to mass market
customers. In addition, because competitive LECs have little experience in successful provision
of local exchange services to mass market customers, there exist few examples of incumbent
LECs' best practices in provisioning inputs for competitive LECs to use for serving mass market
customers that could be used as benchmarks to detect discriminatory and unreasonable
behavior.
176. It is important to recognize, however, that to serve both mass-market customers
and larger businesses, competing local exchange carriers need access to inputs necessary to
terminate local calls in the incumbent's network. Just as we determined that incumbents may
deny or delay access to such inputs for competitors' provision of interexchange services, they may
also do so for competitors' provision of local exchange services to all types of customers. This
type of discrimination is subtle and not readily detectable.
(i) Post-Merger Incentive and Ability to Discriminate
177. As we found in the context of retail advanced services and interexchange services,
there are external effects to discrimination in the provision of retail local exchange services on a
multi-region basis. The merged entity, with a larger local footprint, would realize more of the
gains from such external effects, thus increasing its incentive to act in a discriminatory manner in
one area, to produce these effects in another. For national competitive LECs, such as large
interexchange carriers, that plan to offer local service on a large scale in numerous major regions,
entry into various areas likely will entail common research, product development, and marketing
costs that must be covered by the sum of the competitive LEC's area-specific profits. For such
national carriers, the discrimination practiced in one region may impair the competitor's national
or multi-regional plans, by increasing the competitor's costs and rendering it unable to compete as
effectively or comprehensively as it would absent the discrimination. Therefore, actions that
decrease the profitability of the competitive LEC in one area may make it forgo entry into another
area, or make it a less effective competitor in another area.
178. Bell Atlantic and GTE contend that the current competitiveness in the wireless
telecommunications market, indicates that incumbent LECs have neither the ability nor the
incentive to discriminate against rivals that rely on the incumbent LECs in order to provision these
services. We disagree. An incumbent that weakens a competitive carrier's chance of
providing competitive local exchange service in one region weakens that carrier's chances of
doing so in other areas as well, due to economies of scale and scope. The merged entity will be
able to internalize the external effects of discriminatory conduct. Because of the possibility of
internalizing such spillover effects, the incentive for the combined entity to discriminate against
competitors providing retail local exchange services in particular areas within the combined region
will be greater than the incentive for each company acting as a single entity.
179. Many of the conditions proposed by Bell Atlantic and GTE, and adopted today,
address the concerns created by the public interest harms that are concomitant with this merger.
For example, the conditions regarding performance measures, OSS reform, and collocation should
constrain substantially the merged entity's ability to engage in discrimination against rival local
exchange providers. The nexus between the aforementioned conditions and harms mitigates the
damage caused by the merger and bolsters the competitive landscape in the merged entity's
region.
a. Conclusion
180. For the reasons discussed above, we conclude that, as a result of the merger, the
post-merger Bell Atlantic/GTE will have an increased ability and incentive to discriminate against
rival providers of advanced services, and particularly new types of advanced services, in the
combined region. We also conclude that the combined entity will have an increased incentive and
ability to discriminate against rival providers of interexchange services, local services, and bundled
local and long distance services. Although the Commission issues rules to prevent discrimination,
and will continue to do so, it is impossible for the Commission to foresee every possible type of
discrimination, especially with evolving technologies; therefore, we cannot rely on a regulatory
solution to address unforeseeable competitive harms that may arise as a result of the merger. In
this Order, we adopt a number of conditions that guard specifically against the discrimination
harms identified above, without imposing cumbersome, detailed regulatory oversight.
CLXXXI. Analysis of public interest benefits
A. Background
182. In addition to assessing the probable public interest harms of the proposed merger,
we also must consider whether the merger is likely to generate redeeming public interest
benefits. In doing so, we ask whether the merged entity is likely to pursue business strategies
resulting in demonstrable and verifiable benefits to consumers that could not be pursued but for
the merger. Public interest benefits also include any cost saving efficiencies arising from the
merger if such efficiencies are achievable only as a result of the merger, are sufficiently likely and
verifiable, and are not deemed the result of anti-competitive reductions in output or increases in
price. Finally, merger specific benefits may also include beneficial conditions proffered by the
Applicants or other parties or imposed by the Commission.
183. As detailed above, we conclude in this Order that the proposed merger of Bell
Atlantic and GTE is likely to result in substantial harms to the public interest. In considering
whether the overall effect of the merger is nevertheless to advance the public interest, we employ
a balancing process that weighs probable public interest harms against probable public interest
benefits. Applicants can therefore carry their burden of demonstrating that the proposed
transaction is in the public interest under the Communications Act only if the transaction on
balance will enhance and promote the public interest. As the harms to the public interest become
greater and more certain, the degree and certainty of the public interest benefits must also increase
commensurately in order for us to find that the transaction on balance serves the public interest.
This sliding scale approach requires that where, as here, potential harms are indeed both
substantial and likely, the Applicants' demonstration of asserted benefits also must reveal a higher
degree of magnitude and likelihood than we would otherwise demand.
184. Applicants assert that the proposed merger will provide public interest benefits that
are sufficient to satisfy our public interest balancing test. To satisfy their burden, the Applicants
must demonstrate that their merger is a reasonably necessary means to enable them to achieve the
asserted benefits, i.e., that the benefits are specific to the merger. Should the Applicants be able
to pursue the strategies identified as resulting in public interest benefits without merging,
consumers could achieve the claimed benefits without suffering the harms of the merger. A mere
recitation by the Applicants that they will provide some benefit only if their license transfer is
approved therefore is insufficient to show that a particular benefit is merger specific. Rather,
the Applicants must point to specific evidence that the benefit is dependent on the merger.
185. The Applicants' initial and supplemental application claim several public interest
benefits of the merger. First, Applicants assert that the merger will enable the combined company
to attack the local markets of other incumbent LECs on a widespread and effective basis and that
that the merger will add an important new competitor to the top tier of national providers that can
offer consumers a full bundle of telecommunication services in all major markets. Second, Bell
Atlantic and GTE maintain that the merger will enhance the competitiveness of GTE's Internet
backbone and data services, and by doing so will promote competition in those markets. Third,
the Applicants claim that the merger will increase competition in the long distance market by
speeding the deployment of a national long distance network to compete with the "Big Three"
facilities based providers. Finally, the Applicants argue that the merger will combine the
companies' complementary wireless assets to enable to new company to offer a broader range of
services more efficiently to customers. We discuss each of the asserted benefits in turn,
concluding that the Applicants have provided insufficient evidence to support their claims and,
therefore, have not demonstrated that the overall effect of the proposed merger will be to enhance
the public interest.
186. We conclude that, without considering the conditions proposed by the Applicants,
Bell Atlantic and GTE have not carried their burden of demonstrating that the proposed merger
will create verifiable merger-specific public interest benefits that offset the merger's likely public
interest harms. More specifically, we conclude that to the extent that Applicants have provided
sufficient evidence to support the asserted public interest benefits, the resultant benefits are
modest. Accordingly, we conclude that, in combination, the asserted potential public interest
benefits are insufficient to offset the merger's potential public interest harms. As described further
below, however, the addition of the stringent and enforceable merger conditions proposed by the
Applicants alters the public interest balance and causes us to conclude that the proposed merger is
in the public interest and may be approved.
A. Internet Backbone Services
187. We first conclude that the Applicants have not met their burden of demonstrating
that the proposed merger will produce a public interest benefit by promoting competition in the
provision of Internet backbone services. First, as the Applicants' themselves point out, the
ultimate recombination of GTE's Internet data business with Bell Atlantic's local customers is
entirely speculative. On one hand, Applicants argue that there is a genuine and substantial
possibility that they will not exercise their option to reacquire Genuity, while at the same time
they claim that the ultimate recombination of the merged firm with Genuity will result in a
significant benefit to the Internet and data services market. We agree with AT&T that the
Applicants' cannot have it both ways. Indeed, Applicants themselves recognize that their
strategy of bundling long distance data services with local services is dependent upon obtaining
section 271 authority in Bell Atlantic's region. The uncertainty regarding section 271 approvals
makes the claimed benefits speculative at best and, therefore, difficult to evaluate. Accordingly,
we conclude that the dependency of the Applicants' recombination strategy upon section 271
approvals is a substantial constraint upon the implementation and success of such a plan, and,
therefore the claimed benefit is neither likely nor credible.
188. Second, we reject the Applicants' assertion that the ultimate recombination of
Genuity and the merged firm will produce a public interest benefit as a result of increased
competition in the Internet backbone market. As an initial matter, we conclude that the
Applicants have not demonstrated any merger-specific benefits to the market for Internet
backbone services. Although we agree with the Applicants that the Internet backbone market is
highly concentrated, we nonetheless conclude that the Bell Atlantic and GTE have presented
insufficient evidence regarding how their proposed merger would alleviate such concentration and
benefit consumers of long-haul data services. Rather, Applicants simply assert that Genuity will
be a critical competitor in a market controlled by the "Big Three" long distance providers.
Although this may be the case, there is no indication in the record that the merger of Bell Atlantic
and GTE will produce a public interest benefit by deconcentrating or otherwise altering the
market, assuming that the merged firm ultimately recombines with Genuity. Indeed, all the
merger could hope to accomplish would be to strengthen an existing competitor in an already
concentrated market; it would not add a new competitor to that market.
189. Moreover, we reject the argument that a portion of the alleged benefits to the
Internet backbone market will be realized during the period that Genuity remains an independent
company. Although Applicants contend that the merged entity will offer Internet services in
New York and in the states outside of Bell Atlantic's region and enter into joint marketing
agreements with Genuity in those areas, Applicants have made no showing that such activities
would produce any benefit to consumers or to the public interest. Nor have Applicants
demonstrated why such asserted benefits would increase as the merged entity receives additional
authority under section 271. We conclude that absent Bell Atlantic's full compliance with
section 271, any pro-competitive benefits that might arise from combining Bell Atlantic's in-
region local customers with GTE's long distance voice and data customers would be negligible.
Further, we are unpersuaded by Applicants' attempt to distinguish its combination from that of
SBC and Ameritech because Bell Atlantic has been granted section 271 authority in New York.
Rather, we conclude that section 271 relief in one of thirteen states, although representing a
significant percentage of access lines, is not likely to produce the level of competitive activity in
the Internet backbone market necessary to achieve the asserted potential public interest benefit.
190. We do agree, however, that the merger of Bell Atlantic and GTE will produce the
public interest benefit of increasing competition in Bell Atlantic's local markets by providing the
merged company with a strengthened incentive to satisfy section 271. The merged entity has
strong incentives to make reacquire Genuity's Internet backbone so that it can provide bundled
services to its large business customers with a national presence. In order to do so, however,
the merged firm would require authorization from the Commission to provide interLATA under
section 271. Accordingly, the merged firm will have an increased incentive to pursue and receive
section 271 authority in Bell Atlantic's in-region states. As a result, we conclude that the merged
entity will pursue a course of action that will have the result of increasing competition and
benefiting consumers in the markets for local telecommunications services in those states.
A. Local Exchange and Bundled Services
191. With regard to the Applicants' contention that the proposed merger will promote
greater competition in the market for local exchange services, we conclude that the merger is not
necessary to obtain potential public interest benefits. Although we find that the merger may
permit the Applicants to reach out-of-region local markets more rapidly than they could on their
own, this potential benefit is extremely modest. Similarly, with respect to the Applicants' claimed
benefits to the market for bundled telecommunications services, we conclude that, because it is
dependent upon section 271 authority, the Applicants' strategy of offering Bell Atlantic's large
business customers a complete bundle of local, long distance, and data services is too speculative
to offer substantial public interest benefits.
192. In their initial and supplemental applications, the Applicants commit that within
eighteen months of the merger's approval, they will provide a complete bundle of
services including advanced data and voice, Internet, long distance, and local services to large
business customers in twenty-one cities spanning the territories of every other BOC. This
expansion would be accomplished by providing nationwide bundled services to the out-of-region
offices and affiliates of Bell Atlantic's "anchor customers."
1. Entry into Out-of-Region Local Exchange Markets
193. We conclude that, whatever benefits might arise from the Applicants' proposed
out-of-region strategy, they cannot be used to justify the merger because the merger is not a
sufficiently necessary condition to pursuing out-of-region entry into local and bundled
telecommunications markets. We find that each of the Applicants has both the ability and
incentive to implement an out-of-region strategy on its own. The Applicants do not need to
merge to become successful out-of-region competitive LECs, nor does their merger increase the
likelihood that either or both will seek to implement an out-of-region strategy. We find the only
merger-specific benefit to be the speed with which the Applicants can reach their goal of entering
twenty-one markets outside of their traditional regions.
194. We conclude that the out-of-region local and bundled services plans contemplated
by the Applicants could be obtained by either of the companies acting individually. Accordingly,
any benefits accruing from those plans cannot be attributed to the merger. We concluded above
that the merger causes a public interest harm by eliminating GTE as among the most significant
potential participants in the mass market for local exchange and exchange access services in Bell
Atlantic's region. Additionally, we found that both GTE and Bell Atlantic are most significant
market participants in out-of-region larger business markets. Accordingly, as out-of-region
competitors we consider Bell Atlantic and GTE to be unusually qualified. We are thus
unpersuaded that neither could implement the out-of-region expansion without completing the
proposed merger.
195. Although the Applicants claim that the proposed merger will make it possible for
the combined company to enter a large number of new local markets by allowing it to building
upon Bell Atlantic's existing account relationships with large businesses, we find that each of
the Applicants is fully capable of undertaking a strategy of the size and scope of their stated out-
of-region plan. Many competitive LECs that lack the size, resources, and assets of either Bell
Atlantic or GTE are presently pursuing significant entry plans in multiple markets. Indeed, the
evidence of prior out-of-region activity by GTE suggests that it already has exhibited the ability to
expand absent this merger. As Applicants themselves recognize, GTE has an established and
operational competitive LEC with approximately 60,000 customers outside its local service
territory, including seventeen of the twenty-one markets the merged firm has targeted for out-of-
region expansion. Indeed, GTE's 1999 Annual reports touts its competitive LEC as being one
of the largest in the nation. Similarly, Bell Atlantic has an equity investment of more than $700
million in Metromedia Fiber Network, an entity from which Bell Atlantic will purchase dark fiber
in several out-of-region cities. Such a transaction indicates both an ability and an intent on Bell
Atlantic's part to expand out-of-region on its own.
196. Moreover, we conclude that the Applicants have failed to demonstrate that Bell
Atlantic's Fortune 500 customers based in the northeastern United States are necessary to a
successful launch of an out-of-region strategy. Applicants claim that they require a larger
customer base because their out-of-region plans involves a facilities-based entry strategy that
requires a broad base of customer relationships to support the large capital investments necessary
to deploy new switches and networks and that neither firm by itself could support such
investments without. Although we recognize that spreading costs across a broader number of
customers would reduce the cost per customer of geographic expansion, we question the
Applicants' assertion that neither company individually has a sufficiently broad and large customer
base to venture out-of-region. Moreover, Bell Atlantic and GTE do not propose to bring these
claimed benefits to mass market consumers of local and bundled services. Accordingly, the
asserted benefit would be confined to larger business markets, further demonstrating the limited
and modest nature of the Applicants' claimed benefit.
197. We also reject the argument that Bell Atlantic cannot reach its large business
customers alone because it lacks the facilities, platform capability, and marketing and distribution
channels required to reach far beyond its concentrated franchise. According to the Applicants,
the merged entity will be able to utilize Bell Atlantic's existing relationship with Bell Atlantic's
large business customers to sell through to their subsidiaries or affiliates in out of region
locations. Although combining with GTE may well enhance Bell Atlantic's ability to expand
out-of-region, the Applicants have failed to demonstrate that either firm lacks the ability to do so
alone and, therefore, that the merger is necessary to accomplish such an expansion.
198. We find that in the context of the Applicants' strategy to expand into markets for
local and bundled telecommunications services out of region, the single primary benefit of the
merger is speed. By combining GTE's more geographically disperse presence with Bell Atlantic's
customer base, Applicants can likely achieve their goal of establishing a presence in the twenty-
one targeted markets somewhat faster by completing the proposed transaction than by rolling out
competitive services in these markets on their own. As a result, those markets will receive the
benefits of competition more rapidly as a result of the merger than without. We find this limited
benefit, even when considered in combination with the remaining benefits claimed by the
Applicants, is modest.
1. Provision of Nationwide Bundled Services
199. We similarly conclude that Bell Atlantic and GTE have made an insufficient
showing that substantial potential public interest benefits will result from the merged firm entry
into the nationwide bundled services market. Moreover, any benefits that might accrue from the
merged firm's entry into out-of-region bundled services markets are dependent upon securing
section 271 authority in Bell Atlantic's local markets and, therefore, remain speculative in nature.
200. The Applicants' out-of-region strategy is premised upon combining the local, long
distance, Internet, and wireless businesses of Bell Atlantic and GTE. As such, this strategy
requires the Applicants to obtain authority to provide long distance services within Bell Atlantic's
region. Without section 271 approval to offer long distance voice and data services, the
Applicants would suffer from the same product constraints that prevent them today from
competing for all of the voice and data business of their customers. Indeed, according to the
Applicants' own reasoning, if the merged firm is not able to provide bundled interLATA services
to Bell Atlantic's base of large business customers, it will also be unable to follow these customers
into any of the twenty-one cities targeted for out-of-region expansion. We conclude, therefore,
that for the Applicants' out-of-region strategy to be implemented successfully, the Applicants'
own evidence indicates that they must possess and offer a full suite of services, which is
dependent not on the merger, but on the Applicants gaining section 271 approval in-region.
201. The Applicants themselves recognize that their strategy of offering bundled
services nationwide is dependent upon gaining section 271 authority in Bell Atlantic's region.
With respect to out-of-region expansion, the Applicants have stated that the merged firm "may
not be able to implement fully its plan to offer out-of-franchise service in twenty-one cities
without 271 approval, because that plan relies in part on the combined company's ability to
provide bundled services to large business customers without regard to geographic
boundaries." The Applicants similarly recognized that if the merged firm were to lack the ability
to provide long distance, Internet, and data services on a national basis, it would be more difficult
to market effectively to its customers. As the Applicants stated, Bell Atlantic/GTE "would be
unable to serve residential customers out-of-franchise because residential target markets were
selected based on long-distance affinities with cities in the Northeast."
202. Although, as we conclude above, the merged firm will have the incentive to pursue
section 271 authority more quickly than would Bell Atlantic on its own, the timing of section 271
approval in the entirety of Bell Atlantic's region remains uncertain. As a result, it is difficult to
evaluate the extent of the Applicants' claimed benefits from attempting to compete out-of-region
because those benefits are speculative at best. Although we expect that the Applicants will
move ahead aggressively to meet their out-of-region deployment schedule, it is impossible to
predict obstacles they may encounter in obtaining section 271 authority. Any delays to section
271 approvals will affect implementation of the merged firm's bundled services strategy, thereby
resulting in delayed benefits to telecommunications markets and consumers. We therefore
conclude that the dependency of the bundled services plan upon section 271 approvals is a
substantial constraint to both the full implementation and success of the Applicants' plans.
203. In addition, we conclude that the extent of the benefits of the merged firm's entry
into the nationwide market for voice and data products, even assuming swift section 271
authorization, are modest. Applicants argue that out-of-region expansion will promote
competition in the national market for bundled services by creating a fourth national provider with
the reach and mix of services necessary to compete effectively against the "Big Three"
interexchange providers. The Applicants, therefore, maintain that the addition of another entrant,
the merged Bell Atlantic/GTE, would bring more competition to customers seeking end-to-end
voice and data solutions, both locally and nationally.
204. Although we conclude that the addition of another entrant to these new markets
should benefit the competitive landscape, we question the extent of the benefit. The Applicants
provide insufficient evidence that their entry in the larger business market for bundled and local
services would produce any benefit to the market or to consumers. Accordingly, we conclude
that any benefits accruing from the merged firm's out-of-region local and bundled strategy would
be extremely limited in both magnitude and probability.
A. Long Distance Services
205. We similarly conclude that the Applicants have not demonstrated with any
specificity how their merger is likely to produce public interest benefits in the long distance
market. Bell Atlantic and GTE claim that their merger will permit them to use long distance
capacity to carry their combined volumes on GTE's nationwide network and offer bundles of
services to businesses with offices in both New York and Los Angeles, Seattle, Dallas, Tampa, or
other GTE areas. According to the Applicants, the merger will create an effective competitor in
the market for long distance services and speed the deployment of a fourth national facilities-
based long distance network to compete with the "Big Three" long distance providers.
206. The Applicants, however, have provided no specific evidence demonstrating either
that these claimed benefits are likely to result from the proposed merger or that the merger is at all
necessary to achieve the claimed benefits. With respect to the likelihood of the claimed
benefits, the Applicants have presented no facts indicating that the merged firm's addition to the
long distance market would result in any potential public interest benefit. As we made clear in the
SBC/Ameritech Order, a mere recitation by the Applicants that some benefit will accrue only if
their merger is consummated is insufficient to demonstrate that an asserted benefit is likely or
merger specific. Although we do believe that the ability of the merged firm to provide
nationwide long distance services to Bell Atlantic's largest New York business customers could
result in potential public interest benefits in the long distance market, we are unable to evaluate
the magnitude of the asserted benefits because of the lack of facts and evidence supporting the
Applicants' claims. Because the merged firm would be permitted to utilize Bell Atlantic's
customer base to offer nationwide services only to customers in New York, however, we suspect
that such benefits would be modest.
207. In addition, the Applicants have failed to demonstrate that their merger is
necessary to achieve the asserted benefits in the long distance market, and, therefore, we conclude
that the claimed benefits are not merger-specific. Bell Atlantic, for instance, is capable and has
the incentive on its own to provide long distance services to business customers with offices both
in New York and Los Angeles and any other city. Indeed, Bell Atlantic recently announced plans
to offer long distance services to customers in thirty-three states outside of its region, and there
is no indication in the record that the proposed merger is necessary for implementation of such
plans. Similarly, GTE already boasts a nationwide long distance network, and, in view of the
lack of section 271 authority in the majority of Bell Atlantic's region, we do not believe, nor have
the Applicants demonstrated, that GTE's merger with Bell Atlantic is a necessary precursor to
GTE's ability to compete in the national long distance market. Accordingly, we conclude that
the proposed merger is not necessary to achieve the modest potential benefits in the long distance
market that have been asserted by the Applicants.
A. Wireless Services
208. With respect to wireless communications services, we conclude that the proposed
merger will likely generate benefits for consumers in these markets. These benefits will result
primarily from significant additional progress that the combined firm's wireless business will
achieve toward its goal of establishing a nationwide footprint. By lowering the cost of offering
nationwide service plans, the larger footprint will enable it to compete with other nationwide
wireless competitors more effectively, making possible more attractive rates and better network
coverage.
209. In their applications, Bell Atlantic and GTE claim that the proposed merger will
provide substantial benefits by creating a stronger and more efficient wireless competitor with
coverage that would better enable it to compete with other nationwide competitors. The
Applicants contend that this transaction enhances the overall benefits created by the recent merger
of the U.S. wireless assets of Vodafone and Bell Atlantic. The combination of the three
businesses will create a wireless entity with licenses capable of serving more than 90 percent of
the U.S. population and 49 of the top 50 wireless markets. According to the Applicants, the
combined company would have a footprint capable of serving 232 million people. Hence, this
merger would advance the Applicants' competitive position vis-…-vis the service offerings of
Sprint PCS, AT&T, Nextel, and VoiceStream. Nextel and Sprint PCS each have nationwide
coverage capabilities reaching over 275 million people through their respective license holdings,
AT&T can serve 253 million consumers with its licenses, and VoiceStream has the potential to
provide service to 193 million customers given its current license footprint.
210. We observe initially that the recently completed merger of the U.S. wireless assets
of Bell Atlantic and Vodafone has already created a carrier with a substantial wireless footprint
capable of offering service to 209 million potential customers, thereby achieving considerable pro-
competitive market effects. Consequently, any claims regarding the public interest benefits
arising from Bell Atlantic's merger with GTE must be evaluated carefully in light of the recent
Vodafone transaction. The Applicants state that GTE will contribute "important wireless
properties" in seventeen cities, enabling the new entity to serve 232 million people, or about 23
million more than Bell Atlantic/Vodafone can serve at present. We conclude that these former
GTE consumers in particular will now be afforded access to the range of services that the Bell
Atlantic/Vodafone joint venture currently offers.
211. Accordingly, we conclude that the combination of Bell Atlantic/Vodafone and
GTE will result in certain public interest benefits arising from an expanded footprint. However,
these benefits will not be sufficiently large to alter our overall conclusion that the proposed
merger, absent conditions, would result in substantial harms to the public interest.
A. Efficiencies
212. Based upon the evidence in the record, we conclude that the Applicants have not
demonstrated that the efficiencies and cost savings that they contend will result from the merger
are merger-specific or will mitigate the competitive harms discussed above. Bell Atlantic and
GTE claim that their merger will result in a variety of efficiencies in the form of revenue
enhancements and cost savings. In their initial application, Bell Atlantic and GTE claim that three
years from the merger's closing, the merged entity will achieve $2 billion in annual expense
savings and $0.5 billion of annual capital expenditure savings. The Applicants claim an
additional $2 billion in revenue enhancements from creating and deploying "innovative data and
other services," improving the value and speeding the deployment of long distance services, and
spreading best practices to more efficient market existing services.
213. The Commission has in the past made clear that merger-generated efficiencies can
offset unilateral effects to the extent that they enhance the merged firm's ability and incentive to
compete and, therefore, result in lower prices, improved quality, and enhanced or new
products. Claimed efficiencies, however, must be merger-specific, and, therefore, efficiencies
that could be achieved through means less harmful to the public interest than the proposed merger
cannot be considered true benefits of the merger. In addition, efficiencies resulting in
reductions in marginal costs as opposed to fixed or overhead costs are more likely to offset
competitive harms by counteracting the merged firm's incentive to elevate price.
214. Although we recognize that the merger of Bell Atlantic and GTE would accelerate
the realization of the Applicants' claimed efficiencies, we conclude that only a portion of these
efficiencies are merger-specific. Elimination of duplicative or redundant administrative functions
and the reduction of future equipment purchases, for instance, are direct consequences of the
merger. The same is true with respect to some types of best practices, such as when superior
methods of provisioning and maintenance operations are transferred between companies or when
economies of scale are achieved as a result of the merger. Although these cost-savings may be
merger-specific, they may nonetheless be the result of decreases in output or reductions in
product differentiation. In the Bell Atlantic/NYNEX and SBC/Ameritech Orders, for instance,
the Commission concluded that the elimination of parallel research and development efforts would
eliminate a form of non-price competition in which firms attempt to differentiate products in either
function or quality. As was the case with those transactions, both Bell Atlantic and GTE
engage in research and development, and the merger's consolidation of functions could result in a
reduction in competitive differentiation.
215. Similarly, Applicants have not demonstrated, or even stated, that these cost
savings would be passed through to consumers in the form of lower prices or new or improved
services. As we recognized in the SBC/Ameritech Order, the absence of explicit pass-throughs
committed to by the Applicants renders it difficult to evaluate the extent to which actual cost
savings would benefit the public interest. Additionally, Bell Atlantic and GTE provide little
detail regarding their claimed efficiencies. Although the Applicants have indicated the various
sources of the claimed savings, the record nonetheless lacks sufficient evidence to support those
claimed cost savings. As a result, we find it difficult to evaluate the Applicants' claims and find
them unpersuasive.
216. Bell Atlantic and GTE also claim that the combination of their wireless properties
will result in overall cost savings totaling $1.9 billion, net of integration expenses, measured on a
present value basis. It is not clear from parties' submissions in the record what share of these
cost savings will likely be passed on to consumers in the form of lower prices. However, there
has been significant new entry in the wireless telephony markets over the past few years, and
average prices have declined substantially, suggesting that a significant proportion of these cost
savings may be passed on to wireless consumers as the Applicants compete for business. For
example, we would expect that after the merger, some Bell Atlantic/Vodafone customers will
experience reduced charges when placing or receiving calls while traveling in GTE's former
territory. The Applicants' estimate of prospective cost savings corresponds solely to the addition
of GTE properties, and is independent of a separate estimate for cost savings associated with the
Vodafone transaction.
217. We are similarly unconvinced with respect to the Applicants' claimed revenue
enhancements. During the course of the next three years, Bell Atlantic and GTE claim to realize
$2 billion in additional annual sales in the following areas: vertical services, long distance
acceleration, large business, and data and web hosting. We conclude that these claimed
revenue synergies are extremely speculative and difficult to verify. Although the Applicants' have
indicated the amount of additional revenues they expect to derive from each claimed business line,
they have provided no supporting evidence to persuade us as to their likelihood and verifiability.
Accordingly, although we recognize that some portion of the Applicants' cost savings and
revenue enhancements will result from the merger, we conclude that the Applicants' claimed
efficiencies are insufficient to alter our overall conclusion that this merger does not provide
significant and merger-specific public interest benefits.
A. Conclusion
218. We conclude that the merger brings few tangible merger-specific public interest
benefits to the product markets discussed above. Considered in combination, the Applicants'
claimed public interest benefits and efficiencies are insufficient to outweigh the significant public
interest harms set forth above. Accordingly, we conclude that, absent the conditions proposed by
the Applicants, this merger would cause significant potential interest harms that would not be
outweighed by the combined weight of the modest benefits that the transaction may achieve.
CCXIX. CONDITIONS
220. We conclude above that the proposed merger of Bell Atlantic and GTE poses
significant potential public interest harms by: (a) removing one of the most significant potential
participants in local telecommunications mass markets both within and outside of each company's
region; (b) eliminating an independent source for effective, minimally-intrusive comparative
practices analyses among the few remaining major incumbent LECs as the Commission
implements and enforces the 1996 Act's market-opening requirements; and (c) increasing the
incentive and ability of the merged entity to discriminate against rivals, particularly with respect to
advanced services. We also conclude that these concerns are not mitigated by the proposed
transaction's potential public interest benefits. Thus, if our analysis ended at this point, we would
have to conclude that the Applicants have not demonstrated that the proposed transaction, on
balance, will serve the public interest, convenience and necessity.
221. As noted above, on January 27, 2000, the Applicants supplemented their initial
Application to include, inter alia, a package of voluntary commitments that they submit are likely
to augment the benefits of their proposed merger through promoting the widespread deployment
of local advanced services, spurring local competition, and helping to ensure that consumers
receive high quality and low cost telecommunications services. After receiving extensive public
comment on their proposed conditions, Bell Atlantic and GTE modified their commitments on
April 14, 2000, and in subsequent filings. We believe that the Applicants' package of
conditions, with the modifications by this Commission, alters the public interest balance of the
proposed merger by mitigating substantially the potential public interest harms while providing
additional public interest benefit. Accordingly, with the full panoply of conditions that we adopt
in this Order, and assuming the Applicants' ongoing compliance with these conditions, we find
that the Applicants have demonstrated that the proposed transfer of licenses and lines from GTE
to Bell Atlantic will serve the public interest, convenience and necessity.
A. Adopted Conditions
222. The package of conditions that the Applicants present to bolster the benefits of
their proposed merger is patterned closely after the set of conditions that we adopted less than a
year ago in the SBC/Ameritech Order. Of the 30 separate sections of the SBC/Ameritech
conditions, Bell Atlantic and GTE propose to retain 26. As we did in reviewing the proposed
merger of SBC and Ameritech, here we analyze the effect of the conditions on the public interest
balance of the proposed merger, including the prospects for mitigating the potential public interest
harms that we identify above.
223. In the paragraphs below, we summarize the conditions and describe changes
thereto made a result of commenters' suggestions. We also note where changes were not made,
despite commenters' concerns. Subsequently, we describe the benefits of the conditions. We
explain why we adopt the group of conditions as modified in their entirety and approve the
merger subject to those conditions. Finally, we discuss why we agree with the Applicants that
additional commitments beyond those proffered by the Applicants are not warranted.
224. We adopt, with some modification, the proffered commitments of Bell Atlantic and
GTE as express conditions of our approval of the transfer of licenses and lines from GTE to Bell
Atlantic. For the reasons set forth below, we conclude that, assuming the Applicants' ongoing
compliance with these conditions, Bell Atlantic and GTE have demonstrated that their proposed
transaction, on balance, will serve the public interest, convenience and necessity.
225. As indicated below, these conditions are designed to accomplish five primary
public interest goals: (a) promoting equitable and efficient advanced services deployment; (b)
ensuring open local markets; (c) fostering out-of-territory competition; (d) improving residential
phone service; and (e) ensuring compliance with and enforcement of the conditions. These goals
flow from our statutory objectives to open all telecommunications markets to competition, to
promote rapid deployment of advanced services, and to ensure that the public has access to
efficient, high-quality telecommunications services. Achieving these goals will also serve to
ameliorate the potential public interest harms of the transaction described above.
226. Even though some of the conditions may relate to other requirements that Bell
Atlantic and GTE are or will be subject to under the Act or our rules, the conditions that we
adopt in this merger proceeding are not intended to prejudge, or override, Commission action in
other proceedings. The Commission may, for example, adopt additional requirements in other
more general proceedings that affect matters addressed by these conditions. In that case, because
the conditions are intended to be a floor and not a ceiling, the merged firm would be subject to
the general requirements as well as these conditions. We emphasize that the merged firm must
comply with any applicable Commission orders or rules in addition to the requirements of these
conditions.
227. Nor are the conditions that we adopt today intended to be considered as an
interpretation of sections of the Communications Act, especially sections 251, 252, 271 and 272,
or the Commission's rules, or any other federal statute including the antitrust laws. The
conditions are designed to address potential public interest harms specific to the merger of the
Applicants, not the general obligations of incumbent LECs or the criteria for BOC entry into the
interLATA services market. For example, the Carrier-to-Carrier Performance Plan is not meant
to substitute for any enforcement mechanisms that the Commission may adopt in the section 271
context (i.e., anti-backsliding measures), nor substitute for state performance measure plans. All
of the conditions that we adopt today are merger-specific and not determinative of the obligations
imposed by the Act or our rules on Bell Atlantic, GTE or any other telecommunications carrier.
In particular, we note that our adoption of Bell Atlantic/GTE's proposed conditions does not
signify that, by complying with these conditions, Bell Atlantic/GTE will satisfy its
nondiscrimination obligations under the Act or Commission rules.
228. The conditions are also not intended to limit the authority of state commissions to
impose or enforce requirements that go beyond those adopted in this Order. Because these
conditions serve as a baseline, the Applicants must abide by any applicable state rules, even if
those rules address matters that are included within these conditions, unless the merged entity
would violate one of these conditions by following the state rule. We do not preclude states from
imposing additional rules, regulations, programs or policies that are not inconsistent with these
conditions. As discussed below, however, to the extent that a requirement in these conditions
duplicates a requirement imposed by a state pursuant to its review of the proposed merger, parties
can elect to receive the benefit under either these conditions or the identical state conditions.
229. The conditions we adopt today will remain effective and enforceable for 36
months, unless otherwise specified in the relevant condition. Accordingly, for conditions that take
effect a certain period of time after the merger closing, Bell Atlantic/GTE's obligations under
those conditions would extend from their effective date for a full 36-month period of benefit,
which would fall later than 36 months after the merger closing.
230. We expect that Bell Atlantic/GTE will implement each of these conditions in full,
in good faith and in a reasonable manner to ensure that all telecommunications carriers and the
public are able to obtain the full benefits of these conditions. If Bell Atlantic/GTE does not fulfill
its obligation to perform each of the conditions, pursuant to our public interest mandate under the
Communications Act we must take action to ensure that the merger remains beneficial to the
public. We intend to utilize every available enforcement mechanism, including, if necessary,
revocation of the merged firm's section 214 authority, to ensure compliance with these
conditions. To this end, should the merged entity systematically fail to meet its obligations, we
can and will revoke relevant licenses, or require the divestiture of Bell Atlantic/GTE into the
current Bell Atlantic and GTE companies. Although such action would clearly be a last resort,
it is one that would have to be taken if there is no other means for ensuring that the merger, on
balance, benefits the public.
231. As the Commission previously has stated in the context of approving mergers
between major incumbent LECs, our approval of this Application subject to conditions should not
be considered as an indication that future applicants always will be able to rely on similar public
interest commitments to offset potential public interest harms. Each case will present different
facts and circumstances. Though the SBC/Ameritech Conditions provided a framework for the
conditions that we adopt here, as we discuss above, our review of the merits of the commitments
that Bell Atlantic and GTE proffer is limited to the context of the potential harms and benefits that
are particular to this proposed merger.
232. The Commission also previously has expressed concern regarding consolidation
among the major incumbent LECs, and how such consolidation could gravely impair our
implementation of Congress's directive to open all telecommunications markets to competition.
Indeed, we conclude above that a merger between Bell Atlantic and GTE presents serious
potential for public interest harms arising out of the loss of a significant benchmark, greater
incentive and ability for the companies to discriminate against competitors as a merged entity, and
the loss of a prospective competitor in each other's markets. In the SBC/Ameritech Order, we
held that "[t]he instant transaction, approved with a stringent set of conditions, removes yet
another independent major incumbent LEC, thereby further escalating the burden on any future
major incumbent LEC merger applicants" in establishing that a proposed merger will, on balance,
be pro-competitive and therefore serve the public interest, convenience and necessity.
Likewise, the burden on any major incumbent LEC merger applicants subsequent to today will be
even greater.
233. With respect to the burdens on the applicants for the instant merger, though GTE
is not a BOC, we are mindful that it is a major incumbent LEC. Compounding the loss of a key
benchmark through merging with Bell Atlantic, another major incumbent LEC, is the fact that as a
non-BOC, GTE is not subject to section 271. Thus, GTE does not have the same incentive as a
BOC of gaining authorization to offer in-region, interLATA voice and data services in exchange
for its demonstration that the local telecommunications market in the particular state is open to
competition. Furthermore, several commenters express concern regarding the actual performance
of GTE, in particular, in numerous areas of the realm of opening telecommunications markets to
competition. Accordingly, some of these commenters argue that conditions to the instant
merger should be especially strong with respect to the operation of the merged entity in GTE
legacy service areas. In this regard, we have looked to the Applicants to offer commitments
that would compel or reflect greater results on the part of GTE in opening its markets to
competition. Without the bolstering of these commitments particularly with respect to GTE,
we would be hard-pressed to find that the Applicants meet their already-escalated burden of
establishing that the benefits of the merger will outweigh the harms.
1. Promoting Equitable and Efficient Advanced Services Deployment
234. Separate Affiliate for Advanced Services. Under this condition, Bell Atlantic and
GTE will create, prior to closing the merger, one or more separate affiliates to provide all
advanced services in the combined Bell Atlantic/GTE region on a phased-in basis. The
structural and non-structural safeguards we adopt today will make engaging in anticompetitive
misconduct more difficult. In addition, the separate affiliate condition will counterbalance Bell
Atlantic/GTE's increased incentive to degrade services and facilities furnished to competitors by
making such behavior readily apparent to the Commission and the public. We therefore expect
that strict compliance with the separate affiliate condition will mitigate the substantial risk of
discrimination faced by Bell Atlantic/GTE's competitors after the merger.
235. Establishing an advanced services separate affiliate will provide a structural
mechanism to ensure that competing providers of advanced services receive effective,
nondiscriminatory access to the facilities and services of the merged firm's incumbent LECs that
are necessary to provide advanced services. Because the merged firm's own separate affiliate will
use the same processes as competitors, wait in line for collocation space, buy the same inputs used
to provide advanced services, and pay an equivalent price for facilities and services, the condition
should ensure a level playing field between Bell Atlantic/GTE and its advanced services
competitors. In this regard, the competitive safeguards will provide Bell Atlantic/GTE's
competitors substantial benefits. For example, to the extent a Bell Atlantic/GTE incumbent LEC
allows its separate affiliate to collocate packet switches, routers, or other equipment, the
nondiscrimination safeguards compel the incumbent LEC to allow unaffiliated carriers to collocate
similar equipment on nondiscriminatory rates, terms, and conditions. Similarly, if a Bell
Atlantic/GTE incumbent LEC works with its separate affiliate to develop new systems, products,
or company-wide standards, it must cooperate with unaffiliated carriers in the same way.
236. We expect that Bell Atlantic/GTE's competitors will benefit from the incumbent's
incentive to assist its affiliate because the nondiscrimination safeguards and the rigorous audit
requirements will ensure that they receive the same treatment as the separate affiliate. Because
Bell Atlantic/GTE's Advanced Services Affiliate will have to order line sharing arrangements like
any other advanced services provider, competitive LECs can expect Bell Atlantic/GTE's
incumbent LECs to develop improvements and import best practices to make this ordering
process as simple as possible. Given this expectation, we anticipate that this condition will greatly
accelerate competition in the advanced services market by lowering the costs and risks of entry
and reducing uncertainty, while prodding all carriers, including the Applicants, to hasten
deployment. Consumers will ultimately benefit from this deregulated approach.
237. The separate advanced services affiliate will be distinct from Bell Atlantic/GTE's
in-region telephone companies and operate largely in accordance with the structural,
transactional, and nondiscrimination requirements of sections 272(b), (c), (e), and (g). The
condition specifies certain activities that will be permitted between the Bell Atlantic/GTE
incumbent LEC and the separate affiliate, some of which differ from section 272's
requirements. Specifically, the Bell Atlantic/GTE incumbent LEC and its advanced services
affiliate may jointly market the other's services and perform certain customer care services. In
addition, the incumbent may perform certain operation, installation, and maintenance (OI&M)
functions, pursuant to a tariff, written affiliate agreement, or approved interconnection
agreement, and provide billing and collection services, pursuant to a written agreement, for its
separate affiliate on a nondiscriminatory basis. The incumbent LEC may also transfer to the
separate affiliate specified advanced services equipment on an exclusive basis during a limited
grace period. Starting 90 days after the merger closing, all new advanced services equipment
must be purchased and owned by the separate affiliate. The affiliate may also use the Bell
Atlantic/GTE incumbent LEC's name, trademarks or service marks on an exclusive basis, and
employees of the separate affiliate may be located in the same buildings and on the same floors as
the incumbent LEC's employees. Moreover, although Bell Atlantic/GTE will comply with the
Commission's section 272 accounting safeguards, it will be permitted to deviate from these only
to the extent that it will not have to comply with the Commission's transaction disclosure
requirements under section 272(b)(5) with respect to transactions conducted pursuant to
interconnection agreements between a Bell Atlantic/GTE incumbent LEC and its advanced
services affiliate. To ensure that all transactions between the advanced services affiliate and the
incumbent are conducted on an arms-length basis, Bell Atlantic/GTE's compliance with this
separate affiliate condition will be subject to an annual audit.
238. After a limited transition period, the responsibility to provide advanced services in
the Bell Atlantic/GTE service area will rest with the separate affiliate, and the activities that it and
the incumbent may undertake are specifically set forth in the conditions. Once the separate
affiliate is operating in accordance with the "Steady-State Provisioning" requirements, it will be
operating just like any other unaffiliated provider of advanced services. To ease the transition to
providing all advanced services through a separate affiliate, the conditions permit a Bell
Atlantic/GTE incumbent LEC to perform certain activities on behalf of its affiliate on an exclusive
basis during the transition period. Specifically, for a limited period, a Bell Atlantic/GTE
incumbent LEC may provide limited "network planning, engineering, design or assignment"
services associated with advanced services to its affiliate, and receive and isolate troubles affecting
an advanced services customer on behalf of the affiliate. We emphasize that the transition period
is extremely limited with clear deadlines, and the services that a Bell Atlantic/GTE incumbent
LEC may perform for its separate affiliate are a narrow set of services that may not subsume the
main function of the affiliate. We recognize that the transition period differs from the one
adopted in the SBC/Ameritech Order in that Bell Atlantic/GTE could receive up to 60 additional
days. We find, however, that if the transition is not managed properly, existing advanced
services customers could experience uncalled-for disruption of service. We note, nevertheless,
that competitors will benefit immediately from the separate affiliate conditions because of the
"functional equivalent" requirements, which ensure that Bell Atlantic/GTE will start to operate in
a manner functionally equivalent to a fully operational separate affiliate immediately after merger
closing.
239. Bell Atlantic/GTE's obligation to provide all advanced services through a separate
affiliate will sunset after either: (a) the later of 42 months after the merger's closing, or 36 months
after the incumbent ceases to process trouble reports for the affiliate on an exclusive basis; (b) the
date on which Congress has enacted legislation that specifically prohibits the Commission from
requiring an incumbent LEC to establish a separate advanced services affiliate and the
Commission has modified its rules and regulations in a manner that would materially alter the
structure or interaction between the incumbent and affiliate from that set forth in the conditions;
or (c) nine months after a final, non-appealable judicial decision determines that the separate
advanced services affiliate is deemed a successor or assign of the incumbent, unless that decision
is based substantially on conduct by or between a Bell Atlantic/GTE incumbent and its affiliate
that was not expressly permitted by these conditions.
240. If, after one of these three sunset events occurs, Bell Atlantic/GTE decides to no
longer provide advanced services through a separate affiliate in a particular state, then Bell
Atlantic/GTE will continue certain other obligations until 48 months after the merger closing date.
In that case, Bell Atlantic/GTE must, for example, provide all advanced services through a
separate office or division that will continue using the same OSS interfaces, processes and
procedures that are made available to unaffiliated entities (including using the Electronic Data
Interchange (EDI) interface for processing a substantial majority of pre-order inquiries and
orders). In addition, Bell Atlantic/GTE will continue the surrogate line-sharing and advanced
services OSS discounts, and its incumbent LECs will continue to provide unaffiliated carriers with
the same OI&M services that its retail operations use, as well as those OI&M services that
previously were made available under the conditions.
241. As in the SBC/Ameritech Order, we find, on the basis of the conditions as written,
that the affiliate structure creates a rebuttable presumption that a Bell Atlantic/GTE advanced
services affiliate will not be a "successor or assign" of an incumbent LEC under section 251(h)(1)
or a BOC under section 3(4)(B) of the Act. At the same time, however, we note that if a Bell
Atlantic/GTE incumbent LEC and its advanced services affiliate behave in a manner inconsistent
with the intent of the conditions or engage in activities beyond those expressly permitted in the
conditions, the company bears the risk that the affiliate will be deemed a successor or assign of
the incumbent LEC and, therefore, subject to incumbent LEC regulation under section 251(c).
Accordingly, if a Bell Atlantic/GTE advanced services affiliate is found to be a successor or
assign based on activities that are expressly permitted in these conditions, then, nine months
after such a finding becomes final and non-appealable, Bell Atlantic/GTE will no longer be
obligated under the conditions to provide all advanced services through a separate affiliate,
although it may choose to do so, but will continue to bear certain obligations. If, however, the
separate advanced services affiliate is deemed to be a successor or assign based substantially on
conduct by or between a Bell Atlantic/GTE incumbent and its affiliate that was not expressly
permitted by these conditions, then Bell Atlantic/GTE shall continue providing advanced services
through the affiliate, operating as a successor or assign, for the full duration of the condition.
242. We reject AT&T's argument that the separate advanced services affiliate created
under these conditions necessarily will be a "successor or assign" of Bell Atlantic/GTE incumbent
LECs and thereby subject to incumbent LEC regulation under section 251(c). In the
SBC/Ameritech Order, we addressed these same issues as raised by the commenters there relative
to the separate advanced services affiliate conditions that we applied to the combined
SBC/Ameritech entity. Significantly, we note the separate affiliate conditions in the instant
merger and those that we adopted in the SBC/Ameritech merger are identical in all relevant
respects. Thus, our analysis in rejecting the assertion that the SBC/Ameritech separate
advanced services affiliate is a successor or assign of an SBC/Ameritech incumbent LEC applies
equally here. We hereby incorporate that analysis by reference.
243. We find that, as a general matter, incumbent LECs have no market power in the
advanced services market independent of their bottleneck control of those facilities, such as local
loops, that are necessary to provide such services. As described above, however, we find that,
as a result of the merger, the combined entity will have an increased incentive and ability to
discriminate against other providers of advanced services. In view of this finding, we conclude
that the merged entity has the ability to leverage its control over existing bottleneck facilities to
gain market power in the advanced services market.
244. We find that by requiring the merged entity to provide advanced services through a
separate affiliate, there is less likelihood that it will use its local market power to gain a
competitive advantage in the advanced services market. Specifically, we believe that the merged
entity's incentive to engage in such discrimination will be significantly curtailed by the possibility
of detection. For example, the affiliate transaction rules and other transactional safeguards will
ensure that all interaction between the incumbent LEC and separate affiliate is conducted on an
arms-length basis and that any cross-subsidization is apparent. Similarly, to the extent the merged
entity attempts to provide competitors inferior services or facilities than those which it furnishes
to its affiliate, such discrimination would be detected by the reporting and performance
requirements we adopt today.
245. The separate affiliate, because it does not control any bottleneck facilities, does
not have the potential to leverage existing market power from one market into another.
Specifically, the separate advanced services affiliate is operating on a level-playing field with all
other advanced services competitors, of which there are many. As a new entrant in a nascent
market, it lacks both the incentive and ability to discriminate against its competitors. It lacks the
incentive and ability because, unlike the incumbent, it does not control any of the bottleneck
inputs that are necessary for the provision of advanced services. Accordingly, we find it
reasonable to conclude that the separate affiliate will not occupy a market position comparable to
that of the incumbent LEC in the provision of advanced services and, therefore, should not be
considered a successor or assign of the incumbent LEC.
246. By requiring Bell Atlantic/GTE to provide all of its advanced services through a
separate affiliate, we are not permitting the incumbent to avoid any of its statutory obligations.
For example, the incumbent is still subject to all of the obligations of section 251(c) for the
services and facilities that the incumbent actually provides. The Eighth Circuit has stated,
however, that section 251(c) does not require an incumbent to offer a particular service or a
particular type of network element to competitors in the first instance, if the incumbent is not
providing that service or element in connection with its own operations. Thus, although under
the separate affiliate condition the incumbent will no longer be providing advanced services
subject to the discounted resale obligation of section 251(c)(4), that is not because the incumbent
is being relieved of the requirements of section 251(c)(4), but because the incumbent will no
longer be offering advanced services on a retail basis. Moreover, as discussed above, because
the separate advanced service affiliate does not raise the competitive concerns regarding the
leveraging of market power with respect to advanced services that would exist if the incumbent
continued to provide those advanced services on an integrated basis, the affiliate does not simply
step into the shoes of the incumbent in providing such services so as to become a "successor or
assign" of the incumbent. Rather, just as a BOC affiliate under section 272 would offer long-
distance services (as a non-incumbent) free of the obligations of section 251(c)(4), the advanced
services affiliate should be allowed to offer advanced services free of such obligations.
247. Surrogate Line Sharing Discount. By separating a line into a voice portion and an
advanced services portion and carrying both voice and advanced services traffic simultaneously,
line sharing enables each service to be provided by a different carrier. Conditions that we adopted
in the SBC/Ameritech Order permitted SBC/Ameritech to provide line sharing exclusively to its
advanced services affiliate on an interim basis, subject to SBC/Ameritech offering other carriers a
second loop at a substantial discount in order to ensure that competitors received a benefit
comparable to this "interim line sharing." Subsequent to our adoption of the SBC/Ameritech
Order, however, we adopted a further order in our advanced services proceeding, in which we
required all incumbent LECs to provide nondiscriminatory unbundled access to the high frequency
portion of the local loop, thus promoting line sharing between different carriers. Because
incumbent LECs were expected to provide the high frequency portion of the loop UNE to
competitors by June 6, 2000, exclusive line sharing between an incumbent LEC and its affiliate
is no longer permissible.
248. Thus, these provisions shall apply to the merged entity only if our line sharing rules
are overturned by a final and non-appealable judicial decision. In this manner, the conditions
require Bell Atlantic/GTE to offer unaffiliated carriers the economic equivalent of line sharing if
our line sharing rules are rendered ineffective. This "safety net" presents the benefit of putting
unaffiliated advanced services providers on comparable economic footing with the merged firm's
separate advanced services affiliate, and allowing these carriers to obtain reduced loop costs that
otherwise would not be available to them if our line sharing rules are overturned.
249. In the event our line sharing rules are overturned by a final and non-appealable
judicial decision and Bell Atlantic/GTE and its separate advanced services affiliate engage in
exclusive line sharing, the merged firm will charge unaffiliated providers of advanced services
surrogate charges for an additional unbundled loop, provided that the loop is used solely for the
provision of advanced services (conforming to an industry-standard spectral mask) to a customer
that is receiving voice-grade service, either on a retail or wholesale basis, from a Bell
Atlantic/GTE incumbent LEC. The "surrogate line-sharing charges," which Bell Atlantic/GTE
also would charge to its separate advanced services affiliate for line sharing, represent a 50-
percent discount from the monthly recurring charge and the nonrecurring line or service
connection charge.
250. In light of the ripening of incumbent LECs' line sharing obligations, we disagree
with commenters that suggest that the applicability of this discount be expanded beyond instances
of exclusive line sharing. In addition, we reject Covad's request to tie expanded surrogate line
sharing discounts to a line sharing provisioning benchmark. We find that the line sharing
provisioning performance measurement to be proposed by Bell Atlantic/GTE, which will be
backed by payment-based incentives, is sufficient to ensure nondiscriminatory provisioning of
line sharing.
251. Loop Conditioning Charges and Cost Studies. This condition is designed to
ensure that Bell Atlantic/GTE will not erect a barrier to the competitive deployment of advanced
services by charging excessive rates for loop conditioning. Within 180 days of the merger's
closing, Bell Atlantic/GTE will file with state commissions cost studies and proposed rates for
conditioning loops used in the provision of advanced services, prepared in accordance with the
methodology contained in the Commission's pricing rules for UNEs. Pending approval of
state-specific rates, Bell Atlantic/GTE will immediately make available to carriers loop
conditioning rates (provided that they are greater than zero) contained in any effective
interconnection agreement to which a Bell Atlantic/GTE incumbent LEC is a party, subject to
true-up. In addition, subject to true-up, Bell Atlantic/GTE will impose no loop conditioning
charges on loops less than 12,000 theoretical feet during this period. Moreover, advanced
services providers will have a choice in the amount and extent of conditioning on any particular
loop.
252. Nondiscriminatory Rollout of xDSL Services. As a means of ensuring that the
merged firm's rollout of advanced services reaches some of the least competitive market segments
and is more widely available to low-income consumers, Bell Atlantic and GTE will target their
deployment of xDSL services to include low-income groups in rural and urban areas. Specifically,
for each Bell Atlantic/GTE in-region state, Bell Atlantic/GTE will ensure that at least 10 percent
of the rural wire centers where it, or its separate advanced services affiliate, deploys xDSL service
will be low-income rural wire centers, meaning those wire centers with the greatest number of
low-income households. Similarly, at least 10 percent of the urban wire centers where the merged
firm or its separate advanced services affiliate deploys xDSL service in each in-region state will be
low-income urban wire centers. These requirements will become enforceable for any given state
180 days after the merger closes and after Bell Atlantic/GTE and/or its advanced services affiliate
has deployed xDSL service in that state in at least 20 urban wire centers (to activate the urban
requirement) or 20 rural wire centers (to activate the rural requirement). After the respective
effective date, Bell Atlantic/GTE will provide nondiscriminatory deployment of xDSL services for
at least 36 months thereafter. Bell Atlantic/GTE will consult with the appropriate state
commission, within 90 days of the merger's closing, to classify all Bell Atlantic/GTE wire centers
in that state as urban or rural. Furthermore, to assist in monitoring the merged firm's equitable
deployment of xDSL, Bell Atlantic/GTE will file publicly a quarterly report with the Commission
describing the status of its xDSL deployment, including the identity and location of each urban
and rural wire center where it has deployed xDSL. We believe that the public interest benefits of
this condition speak loudly and clearly for themselves, and the commenters resoundingly support
it.
1. Ensuring Open Local Markets
253. Carrier-to-Carrier Performance Plan. As a means of ensuring that Bell
Atlantic/GTE's service to telecommunications carriers will not deteriorate as a result of the
merger and the larger firm's increased incentive and ability to discriminate, and to stimulate the
merged entity to adopt "best practices" that clearly favor public rather than private interests,
Bell Atlantic/GTE will file publicly performance measurement data for each of its in-region states
with this Commission, and make such data available over the Internet, on a monthly basis. The
data will reflect Bell Atlantic/GTE incumbent LECs' performance of their obligations toward
telecommunications carriers in 18 different measurement categories. These categories cover
key aspects of pre-ordering, ordering, provisioning, maintenance and repair, and billing associated
with UNEs, interconnection, and resold services. Many of the 18 measurement categories are
divided into numerous disaggregated sub-measurements, thereby tracking Bell Atlantic/GTE's
performance for different functions and different types of service. Furthermore, the list of
measurements reported by Bell Atlantic/GTE under this condition is not static. This list is subject
to addition or deletion, and the measurements themselves are subject to modification, by the Chief
of the Common Carrier Bureau, through a joint semi-annual review with Bell Atlantic/GTE.
254. Under this condition, Bell Atlantic/GTE will either achieve the stated performance
goal for the agreed-upon measures in each state or, if Bell Atlantic/GTE fails to provide service
that meets the stated performance goal, make a voluntary incentive payment to the U.S. Treasury
in an amount varying according to the level and significance of discrimination detected. These
voluntary incentive payments are subject to monthly state-specific caps that total, across all states,
as much as $259 million in the first year, $389 million in the second year, and $516 million in the
third year (i.e., a total of up to $1.164 billion over three years), with a credit for amounts paid to
states and competitive LECs under state-imposed performance monitoring plans or under
liquidated damages provisions of interconnection agreements. Bell Atlantic/GTE's potential
liability may be reduced by up to $125 million in the third year if Bell Atlantic/GTE completes and
deploys its OSS interface and business rule changes before their target date, depending upon the
change and how early it is completed.
255. The specific performance measures that Bell Atlantic/GTE will implement in the
Bell Atlantic legacy service areas are based upon performance measures developed in a New York
collaborative process involving Bell Atlantic's application for in-region, interLATA relief. The
performance measures that Bell Atlantic/GTE will implement in the GTE legacy service areas are
based primarily upon performance measures applicable to GTE that were developed in a
collaborative process in California. Rather than develop a new set of measures for this merger
proceeding, we find that relying upon these performance measures and corresponding business
rules, which may be modified over time, will achieve the goals of the Performance Plan and
conserve time and resources. We emphasize that use of such measures in this merger review
proceeding is not meant to affect, supplant, or supersede any existing or future state performance
plan.
256. These limited performance measures are intended to offset or prevent some of the
merger's potential harmful effects; they are not designed or intended as anti-backsliding measures
for purposes of section 271. Indeed, to the extent that GTE legacy service areas are not subject
to the market opening requirements of section 271 in order for GTE to provide in-region,
interLATA services originating from those areas, these performance measures constitute a
significant benefit of these conditions where states have not implemented performance plans with
respect to GTE. The present performance plan must be viewed in the context of the entire set
of proposed safeguards that comprise the overall merger conditions package. In this regard, we
expect and we encourage each state to adopt rigorous and extensive performance monitoring
programs in connection with section 271 proceedings. Under these conditions, therefore, Bell
Atlantic/GTE's obligations under the plan in a given Bell Atlantic legacy state will terminate upon
the company's authorization to provide in-region, interLATA service in that state. In a similar
vein, these obligations may cease to be effective in any Bell Atlantic/GTE state as determined by
the Common Carrier Bureau Chief where the state commission has adopted a comprehensive
performance plan applicable to Bell Atlantic/GTE. The condition will expire otherwise 36
months after the payment obligation arises in the state.
257. We reject the suggestion of a number of commenters that we impose the complete
list of measurements adopted by the New York commission and California commission. We
also decline to adopt other specific performance measurements advocated by certain parties, or
to make specific changes in the proposal, such as altering the benchmarks or statistical
methodology. We reiterate that the Performance Plan constitutes the Applicants' voluntary
proposal for monitoring and remedying the specific potential public interest harms identified in the
instant merger, including the potential for increased discrimination by the larger merged entity and
the loss of another major incumbent LEC benchmark. The adoption of these measures in the
present merger context does not signify that these performance measures would be sufficient in
the context of a section 271 application. In contrast, performance plans that are being developed
by state commissions in the context of section 271 proceedings serve a different purpose, and may
be designed to cover more facets of local competition and to prevent a BOC from backsliding on
section 271 obligations. The Performance Plan that we adopt today serves a more limited
purpose, and hence has a more limited scope. Moreover, we note that, to account for necessary
revisions or updates, the plan includes a semi-annual review of the plan's measurements by the
Chief of the Common Carrier Bureau and Bell Atlantic/GTE. Significantly, the Performance Plan
is only one component of a broad package of voluntary merger safeguards proposed by the
Applicants. Measures that are sufficient as part of a comprehensive package of safeguards in the
present merger context may not be adequate in the section 271 context.
258. Similarly, we decline to require region-wide uniformity across measurements
between different states, as suggested by several commenters. We find that the plan is
sufficient, for merger purposes, to reduce the larger entity's increased incentive for discrimination
by giving its individual operating companies incentives to treat competitors as they would Bell
Atlantic's or GTE's own retail operations. Other merger commitments, such as the most-favored
nation conditions, address uniformity and the spread of best practices across the merged firm's
service region.
259. Uniform Enhanced OSS (Including Advanced Services OSS). Effective,
nondiscriminatory access to OSS is critical for achieving the 1996 Act's local competition
objectives. The commitments in this condition are intended to facilitate local services competition
(including advanced services competition) in the merged entity's combined service area by
providing entrants additional and more economical options for accessing the merged entity's OSS
on a non-discriminatory basis as compared to its retail operations, and by encouraging
constructive participation by local entrants in the development of the merged entity's systems
used by those local entrants. This condition will thus guard against discriminatory treatment by
the merged entity to its rivals, as well as reduce the costs and uncertainty of providing competing
services.
260. Specifically, Bell Atlantic/GTE commits to establish uniform OSS interfaces and
business rules within the former Bell Atlantic service areas and separately within the former GTE
service areas. In addition, the merged entity will implement uniform transport and security
protocols, uniform OSS functions and product ordering capabilities, and a uniform change
management process across its combined service area. Although several commenters suggested
we should require uniform interfaces and business rules across the entire combined region, as we
did in the SBC/Ameritech proceeding, we find that such a condition is not appropriate under the
facts of this proceeding. Unlike SBC and Ameritech, which were both Bell System companies,
and therefore had relatively similar OSS, Bell Atlantic and GTE's systems "developed from
significantly different sources and, as a result, . . . differ significantly [from each other]." Given
these facts, the Applicants have asserted that to achieve uniformity through the combined region:
(1) it likely will cost "hundreds of millions," if not "billions," of dollars; (2) it could take more
than five years to achieve; and (3) "given the size of the work effort . . . and the unknowns about
the true scope and scale of the project, there is no certainty that Bell Atlantic/GTE would be able
to complete such a project." No commenter has provided any persuasive evidence rebutting the
Applicants' claims. As such, we rely on the Applicants' assertions in concluding that it is,
therefore, not appropriate to require complete uniformity in this proceeding because of the cost
and uncertainty of establishing uniform OSS interfaces and business rules across the combined
region.
261. In addition to the commitments described in the preceding paragraph and in
response to the Comments, however, the Applicants have committed to implement uniform
interfaces and business rules for at least 80 percent of the access lines for the combined Bell
Atlantic and GTE service areas in Pennsylvania and Virginia within five years after the Merger
Closing Date. Although this condition falls short of providing complete uniformity, we find that
the Applicants' commitment to achieve uniform interface and business rules within Bell Atlantic's
service areas and separately within GTE service areas, and commitment to convert systems to
achieve such uniformity across most, if not all, of the Applicants' combined service areas in
Pennsylvania and Virginia furthers the 1996 Act's local competition objectives by providing
competitors with "one-stop shopping" within large areas of the Applicants' region.
262. We find that Bell Atlantic/GTE has made other substantial commitments that,
among other things, provide assurances competing carriers will have input into the development
and deployment of the Applicants' OSS through collaboratives, disputes will be arbitrated by a
neutral third-party, the Applicants' will make incentive payments for non-compliance, and
competing carriers will have a role in the change management process. For example, prior to
implementing its OSS commitments, the merged firm first will prepare a plan of record ("Plan")
outlining the steps it proposes to take in unifying its OSS in the separate Bell Atlantic and GTE
legacy service areas, or in the combined service areas (including Pennsylvania and Virginia), as
applicable. Competitors shall have the opportunity to comment on the Plan and its scope,
including the procedures for a collaborative process. Following submission of the Plan, the
merged firm will collaborate with participating competitive LECs to reach agreement on the
interfaces, enhancements, business rules, data format specifications, transport and security
protocols, and OSS functions and product ordering capabilities to be implemented. The
merged entity must ensure that it makes available to competing carriers all information necessary
for them to fully evaluate the Plan (including, but not limited to, information about its back-end
systems, OSS interfaces, business rules, data specifications, and hardware capabilities) and to
participate productively in collaborative sessions. Failure to provide a sufficient Plan will be
considered a violation of these commitments and this order, and may subject the merged entity to
penalties, fines, or forfeitures pursuant to general Commission authority.
263. Bell Atlantic/GTE and the participating competing carriers shall seek to reach a
written agreement resolving any issues raised by the Plan and the competing carriers' comments
to the Plan. To the extent that Bell Atlantic/GTE and the competitors cannot reach agreement, or
have disputes about the scope of the Plan, including the procedures governing the collaborative
process, they may request resolution of such disputes by binding arbitration conducted by an
independent third-party. We expect that the collaborative and arbitration processes will
generally function in the same way as the processes specified in the conditions attached in the
SBC/Ameritech Order. After completion of the collaboratives and any necessary arbitrations, Bell
Atlantic/GTE will develop and deploy the agreed-upon or arbitrated OSS requirements, such as,
but not limited to, interfaces, enhancements, and business rules, within specified periods of
time. Once deployed, Bell Atlantic/GTE will maintain these OSS requirements for not less than
36 months.
264. The Applicants have also committed to arbitration of disputes concerning the
implementation of the Applicants' commitments and payment for non-compliance. Bell
Atlantic/GTE must substantially comply with the development and deployment requirements
described in these commitments or will be subject to voluntary incentive payments to the U.S.
Treasury of up to $10,000 per business day per state per violation, or up to $110,000 per day
across all of its in-region states, for a missed target date. An arbitrator will determine if Bell
Atlantic/GTE is in substantial compliance and the payment due. As payments will reach back to
the date of the initial violation, Bell Atlantic/GTE has little incentive to delay arbitration.
Subsequent to an arbitration finding that Bell Atlantic/GTE is not in compliance with the
requirements of the condition, it may file a notice with the Chief of the Common Carrier Bureau
that it has corrected the non-compliance and halt payments. If the arbitrator makes a written
finding, and the Chief of the Common Carrier concurs in writing, that Bell Atlantic/GTE
intentionally and willfully failed to comply with the relevant requirements, Bell Atlantic shall make
additional payments of up to $110,000, as determined by the arbitrator, for each business day of
non-compliance.
265. The commitments will counterbalance other difficulties that competing carriers
encounter interfacing with Bell Atlantic/GTE's OSS. For example, Bell Atlantic/GTE will adopt,
subject to state approval where necessary, throughout its region the current Bell Atlantic change
management process originally developed through collaboratives with competitive LECs as part
of the section 271 proceeding before the New York Public Service Commission. Under this
condition, states may choose whether to approve Bell Atlantic/GTE's plan for uniform change
management. Bell Atlantic/GTE will also offer -- for a period of 30 months from the Merger
Closing Date -- to develop and deploy an electronic bonding interface (EBI) throughout its
combined in-region service areas for maintenance and repair of resold local services and UNEs,
including all enhancements that comport with industry standards. Specifically, the requesting
carrier and Bell Atlantic/GTE must enter into a written contract wherein they agree to the nature
of the EBI implementation and the requesting carrier agrees to pay Bell Atlantic/GTE for the
costs of development of any enhancements in advance of industry standards. Disputes between
a requesting carrier and Bell Atlantic/GTE relating to the development and deployment of the EBI
shall be subject to the dispute resolution process for interfaces described in this condition.
266. This condition also provides incentive for Bell Atlantic/GTE to improve the
systems and processes for pre-ordering and ordering of UNEs used to provide xDSL and other
advanced services, and to compensate carriers for the difficulties associated with interfacing with
divergent and unenhanced advanced services OSS. Bell Atlantic/GTE will offer
telecommunications carriers a 25 percent discount from the recurring and nonrecurring charges
for unbundled loops used in the provision of advanced services until: (1) Bell Atlantic/GTE has
developed and deployed, in the manner described above, the advanced services OSS interfaces,
including any agreed-upon or arbitrated enhancements; and (2) the Bell Atlantic/GTE separate
advanced services affiliate uses such interfaces for pre-ordering and ordering at least 75 percent of
the facilities it uses to provide advanced services. This discount will have the added benefit of
lowering unaffiliated carriers' costs of providing competing advanced services. Though Covad
objects to these provisions to the extent that they do not mirror the advanced services OSS
commitments that we adopted in the SBC/Ameritech proceeding, competitive LECs may seek,
in the collaboratives, advanced services OSS enhancements in advance of industry standards and
expedited milestones for the development and deployment of advanced services OSS and
enhancements to it.
267. Finally, commenters also suggest that the Commission should require third-party
testing of the OSS interfaces (including enhancements) to ensure that they are uniform, comply
with applicable standards and guidelines, and are scalable and workable, meaning that they
support seamless end-to-end interoperability for all five core OSS functions. Although we find
that comprehensive third-party testing is useful in other contexts, such as section 271 proceedings
-- in fact, we strongly encourage the use of independent third-party testing as a means of
ascertaining whether a BOC is meeting section 271's requirements -- we decline to require Bell
Atlantic/GTE to submit its OSS interfaces to third-party testing as part of this merger proceeding.
We find it sufficient that Bell Atlantic/GTE has committed to make voluntary incentive payments
if it fails to deploy OSS upgrades in substantial compliance with the collaborative agreement.
Moreover, we note that should Bell Atlantic/GTE fail to develop and deploy OSS interfaces
consistent with the requirements of the conditions or any other conditions, it would be subject to
an enforcement action at the Commission's discretion. We find that this potential liability should
provide adequate incentive for the merged firm to develop and deploy OSS interfaces that fully
comply with the collaborative agreement and are scalable and workable.
268. Training in the Use of OSS for Qualifying Carriers. As a means of reducing the
barriers to new entry in its combined region, Bell Atlantic/GTE will provide special OSS
assistance to any "qualifying" competitive LEC. As in the SBC/Ameritech Conditions, the
Applicants initially proposed to define a "qualifying" competitive LEC as a competitive LEC
having less than $300 million in total annual telecommunications revenues. The Applicants
subsequently expanded their proposal, however, to include in the definition of a "qualifying"
competitive LEC: any competitive LEC that presently serves end users in Bell Atlantic service
areas and not in GTE service areas, but that seeks to extend its services into GTE service areas;
any competitive LEC that presently serves end users in GTE service areas and not in Bell Atlantic
service areas, but that seeks to extend its services into Bell Atlantic service areas; and any
competitive LEC that does not presently serve end users in the service areas of either legacy
company. This revised definition of a "qualifying" competitive LEC, which expands the field of
competitive LECs that are eligible to take advantage of such special OSS assistance, substantially
enhances the benefit of this condition by further reducing barriers to new local competitive entry.
269. As for the nature of this OSS assistance, the merged firm will designate and make
available for a minimum of 36 months at no additional cost one or more team(s) of OSS experts
to assist these qualifying carriers with OSS issues. The condition also obligates Bell Atlantic/GTE
to identify and develop training and procedures beneficial to such qualifying carriers. Disputes
regarding whether a carrier qualifies under this condition will be resolved by the appropriate state
commission. We reject BlueStar et al's and CoreComm's request that this OSS assistance begin
30 rather than 90 days after the merger closing date. We find that there is no material
difference between 30 and 90 days given the fact that this commitment will be adhered to for a full
three years.
270. Collocation, Unbundled Network Elements, and Line Sharing Compliance. The
Applicants have agreed to implement a number of measures to ensure that the companies provide
collocation to telecommunications carriers in a lawful manner. Before the merger closing date,
Bell Atlantic and GTE will file a tariff or offer to amend interconnection agreements in each Bell
Atlantic/GTE state where Bell Atlantic and/or GTE have not done so already to demonstrate
compliance with the Commission's collocation rules. In addition, prior to the merger closing
date, an independent auditor, approved by the Chief of the Common Carrier Bureau, will conduct
a review and determine whether each company is offering collocation terms and conditions, and
has in place methods and procedures, that comply with the Commission's rules. The
Applicants' original proposal provided that the attestation report emanating from this audit would
be filed within 180 days after the merger closing. In response to protest from several
commenters, however, the Applicants revised their proposal such that the attestation report will
be filed within 10 days after the merger closing.
271. After the merger closing, an independent auditor will develop and implement a
comprehensive audit of the merged company's compliance with the Commission's collocation
requirements for four full months after the closing. The audit requirements provide for
Commission review of the audit program, which we expect will enhance the thoroughness and
quality of the audit. The independent auditor will present its final audit report to the Commission,
and publicly file a copy with the Secretary, no later than 210 days after filing of the methods and
procedures audit attestation report. If the auditor's report reveals problems with Bell
Atlantic/GTE's collocation practices and policies, we fully expect that Bell Atlantic/GTE will
implement immediately any necessary corrective action. After reviewing the auditor's findings,
the Commission may, of course, decide to take additional action as deemed necessary and
appropriate. As an additional incentive for the merged firm to provide efficient collocation, Bell
Atlantic/GTE will waive the nonrecurring charges for physical, virtual, adjacent and cageless
collocation arrangements if the firm misses the collocation due date by more than 60 days.
272. Also in response to public comment on their original proposal, the Applicants
agreed to undergo an independent audit of their compliance with our UNE and line sharing
rules. These UNE and line sharing compliance audit provisions take virtually the same form as
the collocation audit conditions. One difference, however, is that unlike in the collocation
compliance plan, there is no separate audit of Bell Atlantic and GTE's UNE and line sharing
methods and procedures compliance. In addition, the independent auditor will present its final
UNE and line sharing audit report to the Commission, and publicly file a copy with the Secretary,
no later than 180 days after the merger closing date, unlike the approximately 220 days after
merger closing afforded for submission of the final collocation audit report. Likewise with this
audit, we fully expect Bell Atlantic/GTE to implement immediately any necessary corrective
action in response to adverse findings by the auditor or we may take any necessary and
appropriate action. This additional audit of Bell Atlantic/GTE's compliance with our UNE and
line sharing rules will be particularly beneficial in assessing Bell Atlantic/GTE's adherence to these
important procompetitive requirements.
273. We find that this condition will make it quicker and easier for the Commission and
others to detect non-compliance with our collocation, UNE, and line sharing rules both prior to
and following the merger. To the extent that the audits uncover one or more violations of our
rules, the Commission's audit staff will refer the matter to the Commission's Enforcement
Bureau. These audits thus will assist this Commission and state commissions in reducing
barriers to competitive provisioning of local voice and advanced services.
274. Most-Favored Nation Arrangements. This condition, designed to facilitate market
entry throughout Bell Atlantic/GTE's region as well as the spread of best practices (as that term is
understood by Bell Atlantic/GTE's competitors), has two components. First, where it is feasible
given technical limitations, Bell Atlantic/GTE will offer telecommunications carriers operating
within its service area any interconnection arrangement or UNE that Bell Atlantic/GTE, as a
competitive LEC outside of its incumbent service area, secures from the incumbent LEC after the
merger closing date, and that was not previously made available by the incumbent. Bell
Atlantic/GTE will make the interconnection arrangement or network element available on the
same terms and conditions as the incumbent, with prices and performance measures determined
on a state-specific basis.
275. Second, where it is feasible given technical limitations, Bell Atlantic/GTE will
make available to any requesting telecommunications carrier in any of its in-region states any
interconnection arrangement or UNE in any other of its in-region states, that was negotiated
voluntarily subsequent to the merger closing date by a Bell Atlantic/GTE incumbent LEC, subject
to state-specific pricing and performance measures. In addition, Bell Atlantic/GTE will make the
interconnection arrangements or UNEs available on the same terms and conditions as those in the
underlying agreement, provided that the interconnection arrangements or UNEs will not be
available beyond the last date that they are available in the underlying agreement, and that the
requesting carrier accepts all reasonably related terms and conditions as determined in part by the
nature of the corresponding compromises between the parties to the underlying agreement.
When a carrier selects an interconnection arrangement or network element for an in-region state
in which no rate for a comparable arrangement or element has been established, Bell Atlantic/GTE
will make the arrangement or element available at the rates in the originating state on an interim
basis until the requisite rates are developed. Disputes regarding the availability of an
interconnection arrangement or unbundled element will be resolved through negotiation between
the parties or by the relevant state commission pursuant to section 252.
276. The Applicants revised their original proposal to allow that the most-favored
nation commitments encompass in-region arbitrated agreements, provisions, and UNEs.
Specifically, where a competing carrier seeks to adopt in an in-region Bell Atlantic/GTE service
area any agreements, provisions or UNEs that resulted from an arbitration arising from the Bell
Atlantic/GTE service area in another in-region state after the merger closing date, either Bell
Atlantic/GTE or the competing carrier may submit the arbitrated agreements, provisions, or
UNEs to immediate arbitration in the "importing" state without waiting for the statutory
negotiation period of 135 days to expire, where the "importing" state consents to conducting
arbitration immediately.
277. This approach towards arbitrated agreements, provisions, and UNEs presents
several potential advantages. First, it should remove any disincentive to negotiate that the bulk of
the commenters fear would be caused by most-favored nation commitments that are limited to
interconnection arrangements and UNEs that are negotiated voluntarily. Second, it will expedite
the ability of competing carriers to resolve contested issues in "importing" states. Third, it
addresses the concern that we expressed in the SBC/Ameritech Order that expanding the
condition to encompass arbitrated arrangements without qualification could interfere with the
state arbitration process under sections 251 and 252 of the Communications Act. We
emphasize that Bell Atlantic/GTE must act in good faith in determining whether to agree
voluntarily to the importation of such arbitrated agreements, provisions, or UNEs and whether to
submit such arbitrated agreements, provisions, or UNEs to immediate arbitration in the
"importing" state(s). Thus, Bell Atlantic/GTE may be subject to penalties, fines or forfeitures
pursuant to general Commission authority if it attempted, in bad faith, to block or delay adoption
in a Bell Atlantic/GTE state of any UNE, whole interconnection agreement, or interconnection
agreement provisions arbitrated in any other Bell Atlantic/GTE state after the merger closing date.
278. We reject assertions by NEXTLINK and NorthPoint that the most-favored nation
provisions should cover performance measures and standards. Because performance measures
are determined by states individually outside of the merger context, we agree with the Applicants
that performance measures should not be subject to the most-favored nation provisions, both out-
of-region and in-region. As the Applicants explain, many states have adopted performance
measures "that are unique to the regulatory environment in that state, including the particular
systems, processes and service provisioning systems already implemented in that state. The
performance measures that are integral to these systems will simply have no applicability in states
with different systems."
279. We also reject the argument of several commenters that any in-region
interconnection arrangement or UNE, regardless of whether it was made available prior or
subsequent to the merger closing, should be obtainable by requesting carriers in any other in-
region service area. Similar to our finding in the SBC/Ameritech Order, we find it reasonable
for this condition to be implemented across the merged firm's combined region on a going-
forward basis only. In this way, Bell Atlantic/GTE will be on notice as to which systems and
procedures could become uniform across its region. Moreover, under the conditions to this
merger, any voluntarily negotiated, in-region interconnection arrangement or UNE will be made
available to requesting carriers in any other in-region service area of the particular legacy
company whose interconnection arrangement or UNE is being extended. Thus, for example,
interconnection agreement provisions voluntarily negotiated by Bell Atlantic's incumbent LEC in
New York prior to the merger closing date will be made available to a requesting carrier seeking
to compete in the Bell Atlantic/GTE service area in Maryland, which is a legacy Bell Atlantic
service area.
280. Multi-State Interconnection and/or Resale Agreements. Negotiating a separate
interconnection agreement between the same parties in multiple states can impose substantial
unnecessary costs and delays on competitors and provides incumbent LECs with an incentive to
game the process. As we discuss above, this merger will increase the merged firm's incentive
and ability to impose unnecessary negotiation costs on its competitors. To neutralize this
incentive, in addition to promoting market entry and assisting telecommunications carriers that
want to operate in more than one Bell Atlantic/GTE state, Bell Atlantic/GTE will offer requesting
telecommunications carriers an interconnection and/or resale agreement covering multiple Bell
Atlantic and/or GTE states, subject to technical feasibility, state-specific pricing, and the
provisions in applicable collective bargaining agreements. Bell Atlantic/GTE will make a
sample generic multi-state agreement available to any requesting carrier no later than 60 days after
the merger closing. Carriers may elect that generic agreement for any number of Bell
Atlantic/GTE states, or may negotiate a different multi-state agreement with Bell Atlantic/GTE.
In addition, in conjunction with the in-region most-favored nation conditions described above,
carriers that negotiate an interconnection agreement with a Bell Atlantic/GTE incumbent LEC in
one state may require Bell Atlantic/GTE to sign the same agreement (exclusive of price)
throughout the Bell Atlantic/GTE region. We decline to require that Bell Atlantic/GTE file in
each of its in-region states generic terms, such as a statement of generally available terms
(SGAT), that include all procompetitive offerings required by the conditions. We find that
such a requirement is unnecessary to achieve the procompetitive benefit of this condition and
would pose unnecessary costs on Bell Atlantic/GTE.
281. Carrier-to-Carrier Promotions. Among the conditions that we adopted in
approving the merger between SBC and Ameritech were unbundled loop discounts and resale
discounts designed specifically to encourage rapid development of local competition in residential
and less dense areas. Although the Applicants' original conditions proposal did not provide for
any such carrier-to-carrier promotional discounts, in response to commenters' protests, the
Applicants have added these promotions to their package of conditions. We find that these
promotions offset the loss of potential competition between Bell Atlantic and GTE for residential
services in their regions and facilitate market entry by competitors.
282. Bell Atlantic/GTE will offer these promotions equally to all telecommunications
carriers with which it has an existing interconnection and/or resale agreement in a Bell
Atlantic/GTE state. Within 30 days after the merger closing, Bell Atlantic/GTE will provide each
such telecommunications carrier a written offer to amend the carrier's interconnection agreement
in that state to incorporate the promotions. The actual offering window for both promotions will
begin 30 days after the merger closing date. For the unbundled loop discount, the offering
window will run through the earliest of: (a) 24 months; (b) for the Bell Atlantic legacy service
areas, the date on which Bell Atlantic/GTE is authorized to provide in-region, interLATA services
in the relevant state; (c) for the GTE legacy service areas, the date on which competing carriers,
in aggregate, offer service over their own facilities to at least 15 percent of incumbent LEC
customer locations in the GTE legacy service areas in that state; or (d) the date on which Bell
Atlantic/GTE has completed 50 percent of the out-of-territory competitive entry commitments in
the conditions. For the resale discount, the offering window will run through the earlier of 36
months, or one month after the date on which the number of resold lines subject to the promotion
in a state reaches the maximum allowable for the relevant state under the conditions.
Notwithstanding these offering windows, the conditions specify the maximum number of lines per
state for which Bell Atlantic/GTE must provide the promotions. Furthermore, each promotion
will last 36 months from the date that the promotional loop or resold service is installed and
operational, or for the duration of the period during which the loop or resold service remains in
service at the same location and for the same carrier, whichever is shorter.
283. Carrier-to-Carrier Promotions: Unbundled Loop Discounts. Bell Atlantic/GTE
will offer a promotional discount on the monthly recurring charges for unbundled local loops
used in the provision of residential local service and not used as part of a UNE platform or in any
other combination with Bell Atlantic/GTE's local switching. The promotional discounts (as well
as illustrative rates) are set forth in the conditions and are, on average within each state, 25
percent below the lowest applicable monthly recurring price established by the state commission.
Bell Atlantic/GTE will make the promotional loop discount available equally to all
telecommunications carriers that request the discount prior to expiration of the offering window
or satisfaction of the line threshold limitation, and the promotion will last 36 months for each loop
requested in that period, or for the duration of the period during which the loop remains in service
at the same location and for the same carrier, whichever is shorter.
284. Carrier-to-Carrier Promotions: Resale Discounts. As another means of
encouraging residential competition in less dense areas, Bell Atlantic/GTE will offer a
promotional resale discount on Bell Atlantic/GTE's retail telecommunications services, where
such services are resold to residential customers. The promotional resale discount shall be 32
percent from retail rates for an initial period, and, for the remaining period of the promotion, a
rate equal to 1.1 times the standard wholesale discount rate established for that service by the
state commission (i.e., a discount of ten percent more than the standard wholesale discount rate).
Bell Atlantic/GTE will make the promotional resale discount available equally to all
telecommunications carriers that request the discount prior to expiration of the offering window
or satisfaction of the line threshold limitation, and the promotion will last 36 months from the date
each resold service is installed and operational, or for the duration of the period during which the
resold service remains in service at the same location and for the same carrier, whichever is
shorter.
285. We decline to increase the resale discount. As we found in the SBC/Ameritech
Order, the 32 percent discount should facilitate competitive entry in the residential market. We
also do not find it necessary at this juncture to take any affirmative steps to "ensure that [Bell
Atlantic/GTE] does not attempt to offset the loss in revenue resulting from . . . [the] residential
resale discount by increasing other charges." Any potential for such attempts does not
undermine the public benefit of this condition, and we expect that state commissions will catch
and suppress any such attempts in the course of their review of Bell Atlantic/GTE's cost studies.
286. We reject commenters' suggestions that we eliminate the restrictions on the
availability of the carrier-to-carrier promotions. For example, commenters seek removal of the
limitation that competitors receiving the promotional unbundled loop discount can only use these
loops for voice services, as well as the residential restriction and line limitation contained in
both of the promotions. Our desire to promote residential competition is consistent with
Congress's intent, through enacting the 1996 Act, to spur facilities-based competition to serve
residential customers. Moreover, we find that the promotions' limited duration and line
limitations will motivate competing carriers to enter the residential market faster to secure the
benefit of the promotions, thereby accelerating the availability of competitive offerings to
residential consumers. Once a carrier secures the promotion, however, it is guaranteed the
promotional terms for a full three-year period. Because our intent is for these promotions to
ignite competition in the residential local exchange or exchange access markets in Bell Atlantic's
and GTE's regions, we decline to expand this particular condition to cover loops used in the
provision of advanced services. Indeed, we note that competitors that choose to use an
unbundled loop to provide advanced services already receive a 25 percent discount elsewhere in
the conditions, through the advanced services OSS discount.
287. We also reject AT&T's arguments that the carrier-to-carrier promotions are
discriminatory and therefore unlawful. First, based on the manner in which Bell Atlantic/GTE
will execute its obligations, we do not find that the residential and voice service restrictions
transgress the Act or corresponding Commission rules. Specifically, Bell Atlantic/GTE will
implement the promotions by voluntarily offering to amend its interconnection agreements with
telecommunications carriers to incorporate the promotional terms. Moreover, Bell
Atlantic/GTE will make this offer in a nondiscriminatory manner to all telecommunications
carriers with which it has an interconnection and/or resale agreement in any Bell Atlantic/GTE
state.
288. The 1996 Act and corresponding Commission rules give incumbent LECs and their
competitors certain latitude to enter into customized contractual arrangements, subject to section
252(i)'s requirement that any negotiated arrangement must be made available to all interested
carriers in the same state upon the same terms and conditions. Section 252(a)(1) provides that
"an incumbent local exchange carrier may negotiate and enter into a binding agreement with the
requesting telecommunications carrier or carriers without regard to the standards set forth in
subsections (b) and (c) of section 251." Likewise, although section 252(e)(2)(B) requires a
finding of compliance with section 251 when state commissions review arbitrated agreements,
there is no corresponding requirement with respect to negotiated agreements. We note,
however, that as AT&T points out, pursuant to section 252(e)(2)(A)(i), a state commission may
reject a negotiated agreement if it finds that the agreement "discriminates against a
telecommunications carrier not a party to the agreement." Thus, the commission in each state
in which Bell Atlantic/GTE will offer the promotions must make its own assessment of whether
the promotions are discriminatory.
289. AT&T also contends that the line limitation on the number of discounted loops
and resale offerings that will be made available to competitive LECs would violate the "pick and
choose" rule of section 252(i), as well as the nondiscrimination requirements of section 251(c)(3)
and 252(d)(1). We note that, under the specific terms of the merger conditions, these
promotions are being offered to competitors in a nondiscriminatory fashion. Specifically, in each
of its states, Bell Atlantic/GTE will offer the promotion simultaneously to all telecommunications
carriers that have an existing interconnection and/or resale agreement with Bell Atlantic and/or
GTE. This should ensure that all competitive LECs operating in Bell Atlantic/GTE's region will
be afforded an equal opportunity to participate in the promotions. Moreover, carriers that begin
operating in Bell Atlantic/GTE's region, or decide to participate in the promotions, after this
initial offer period will have the opportunity to participate in the offerings, and Bell Atlantic/GTE
will respond to inquiries by all carriers within 10 business days. Finally, Bell Atlantic/GTE will
notify all carriers operating in the state when 50 percent and 80 percent of the maximum lines in
that state are reached.
290. Offering of UNEs. In order to reduce uncertainty to competing carriers from
litigation that may arise in response to our orders in the UNE Remand and Line Sharing
proceedings, from now until the date on which the Commission's orders in those proceedings, and
any subsequent proceedings, become final and non-appealable, Bell Atlantic and GTE will
continue to make available to telecommunications carriers, in accordance with those orders, each
UNE and combination of UNEs that is required under those orders, until the date of any final and
non-appealable judicial decision that determines that Bell Atlantic/GTE is not required to provide
the UNE or combination of UNEs in all or a portion of its operating territory. This condition only
would have practical effect in the event that our rules adopted in the UNE Remand and Line
Sharing proceedings are stayed or vacated. Compliance with this condition includes pricing these
UNEs at cost-based rates in accordance with the forward looking cost methodology first
articulated by the Commission in the Local Competition Order, until the date of any final and
non-appealable judicial decision that determines that Bell Atlantic/GTE is not required to provide
such UNEs at cost-based rates.
291. Alternative Dispute Resolution Through Mediation. As a means of streamlining
and expediting resolution of carrier-to-carrier disputes, Bell Atlantic/GTE will offer
telecommunications carriers, subject to the appropriate state commission's approval, an option of
resolving interconnection agreement disputes through an alternative dispute resolution mediation
process that may be state-supervised. This mediation process supplements, rather than
supersedes, any other options at the carrier's disposal for addressing interconnection disputes with
Bell Atlantic or GTE, including negotiated dispute resolution mechanisms. We note that no state
or competitive LEC is required to adopt or participate in this process. Furthermore, nothing in
this condition in any way limits the ability of carriers to pursue enforcement remedies, including
informal mediation, at the Commission pursuant to section 208.
292. Access to Cabling in Multi-Unit Properties. In order to provide information
regarding possible options for additional competition in the provision of local service to multi-unit
properties, Bell Atlantic/GTE will conduct a trial that will provide telecommunications carriers
with access at a single point of interconnection to cabling owned or controlled by Bell
Atlantic/GTE in multi-tenant residential and business properties. As a separate commitment,
Bell Atlantic/GTE will design, install and provide all new cabling owned or controlled by Bell
Atlantic/GTE in a manner so that it can be accessed by any telecommunications carrier at a single
point of interconnection, located at the minimum point of entry. We decline to implement
Covad's suggestion that Bell Atlantic/GTE implement a trial scheme identical to the one that we
adopted in approving the merger between SBC and Ameritech. The Applicants represent that
Bell Atlantic initiated a trial earlier this year in New York City allowing a competitive LEC to
install cross-connects to house and riser cable, and that it has an existing tariffed service in New
York and a tariff pending in Massachusetts that give competitive LECs access to such cabling.
Moreover, as specified by the condition, Bell Atlantic/GTE will take the needed steps elsewhere
to expand access at single points of interconnection to cabling owned or controlled by Bell
Atlantic/GTE in multi-tenant residential and business properties. We believe that the
Applicants' commitment to provide carriers with access to incumbent LEC owned or controlled
cabling behind a single point of interconnection for multi-unit properties and campuses of garden
apartment dwellings will further significantly competitors' access to cabling. We also note that,
in addition to these conditions, Bell Atlantic/GTE must comply with the rules that we adopted in
the UNE Remand Order regarding competitive LEC access to cabling at a single point of
interconnection, located at the minimum point of entry.
1. Fostering Out-of-Territory Competition
293. Out-of-Territory Competitive Entry. As a condition of this merger, between the
merger closing date and the end of the 36th month thereafter, the combined firm will spend at
least $500 million to provide competitive local service and associated services outside of the Bell
Atlantic and GTE legacy service areas. Specifically, "competitive local service" is defined to
include traditional local telecommunications services that compete with like services offered by
incumbent LECs, provision of advanced services to the mass market, and resale. Additional
expenditures that otherwise may count towards fulfillment of the out-of-region commitment
include those devoted towards provision of "other telecommunications services" or information
services that are offered jointly with competitive local service, as well as investments in, or
contributions to, ventures that provide competitive local service activity in out-of-region markets.
Bell Atlantic/GTE must devote at least 50 percent of the out-of-region expenditure commitment
to facilities-based competitive service, and it may allot the remaining portion to acquire customers
for competitive local service in those out-of-region markets. Notwithstanding the expenditures,
the merged firm will be deemed to have satisfied the out-of-region commitment if it provides
service, during the 36-month period described above, over at least 250,000 customer lines that are
used to provide competitive local service in out-of-region markets.
294. Bell Atlantic/GTE will be subject to voluntary payments to the U.S. Treasury in
the amount of 150 percent of any shortfall in its out-of-region expenditure. Similarly, the merged
entity will pay 150 percent of any amount by which it falls short of devoting $250 million to
facilities-based service, though this payment for inadequate facilities-based service expenditures
will be offset by half of the amount of any payment for a general shortfall in its out-of-region
expenditure. Bell Atlantic/GTE would therefore be obligated to pay $750 million for missing all
of its out-of-region entry requirements. In addition, the Applicants have committed to annual
benchmarks under which they must, pursuant to this condition, spend $100 million or provide
service over at least 50,000 customer lines between the merger closing date and the end of the
first year thereafter, and spend $300 million or provide service over at least 150,000 customer
lines by the end of the second year. Furthermore, the Applicants have undertaken to devote at
least 20 percent of their expenditures or customer lines specifically towards providing competitive
local service to residential customers or towards providing advanced services. These benchmarks
likewise are backed by voluntary payments in the amount of 150 percent of any shortfall, and
these benchmark voluntary payments will offset any payments that the merged firm is obligated to
make for not completing its out-of-region expenditure by the end of the 36 month period
following the merger closing.
295. Notwithstanding the differences between the Applicants' out-of-region
competition commitment and SBC/Ameritech's "National-Local Strategy" for out-of-territory
competitive entry, we disagree with AT&T's characterization of the Applicants' commitment as
a "sham." We believe that the Applicants' out-of-region competition commitment is sufficient
to ensure that residential consumers and business customers outside of Bell Atlantic/GTE's
territory will benefit from meaningful, facilities-based competitive service. We also anticipate
that this condition will stimulate competitive entry into the Bell Atlantic/GTE region by the
affected incumbent LECs. Moreover, the Applicants have proposed annual expenditure
benchmarks that are backed by payments to the U.S. Treasury for failure to meet the benchmarks.
Although the Indiana commission maintains that it will be difficult to ensure compliance with the
expenditure requirements, we are confident that the annual audit of Bell Atlantic/GTE's
compliance with all of the conditions should uncover any non-compliance with the out-of-region
expenditure commitment.
296. In addition, we agree with the Applicants that we need not implement the Indiana
Commission's prescription that at least half of the out-of-region expenditure commitment should
be used for "local" service. Assuming, as the Applicants do, that by "local" the Indiana
Commission means traditional voice services, we do not perceive the need to impose such a
restriction. Indeed, section 706 of the 1996 Act mandates that the Commission encourage
widespread deployment of advanced services nationwide, and the Applicants include advanced
services among the services that the merged firm may deploy in attempting to satisfy the out-of-
region competition commitment.
297. Similarly, we disagree with AT&T's contention that the "technology neutral"
aspect of the out-of-region commitment undermines its benefit. As the Applicants explain,
given the rapid pace of technological change, they expressly fashioned the commitment to be
technology neutral in order to allow devotion of resources to evolving technologies. Indeed,
imposing additional restrictions could severely limit the Applicants' ability to undertake innovative
business strategies or ventures with other firms. Finally, AT&T's concern that the Applicants
may satisfy this commitment wholly by "implementing their existing pre-merger plans to offer out-
of-region wireless services" is defeated by our clarification that commercial mobile radio services
may not count towards satisfaction of the commitment.
1. Improving Residential Phone Service
298. Pricing of InterLATA Services. As a direct benefit to consumers, particularly low-
income consumers and low-volume long distance callers, this condition provides that Bell
Atlantic/GTE will not charge residential customers a minimum monthly or minimum flat rate
charge for long distance service for a period of not less than three years. This requirement
should not only benefit those customers that make few long distance calls, but also should help to
ensure that long distance services continue to be available to all consumers at competitive
prices.
299. Enhanced Lifeline Plans. Designed specifically to ensure that the benefits of the
merger extend to low-income residential customers throughout all of Bell Atlantic's and GTE's
regions, this condition requires the merged firm to offer each of its in-region states a plan to
provide discounts on basic local service for eligible customers. Bell Atlantic/GTE will offer a
low-income Lifeline universal service plan modeled after the Ohio Universal Service Assistance
(USA) Lifeline plan that Ameritech and Ohio community groups negotiated in 1994 and later
revised to adjust to the 1996 Act. It also will incorporate elements from the December 1998 Ohio
Commission Order addressing the Ohio USA plan. Specifically, Bell Atlantic/GTE will offer to
provide a discount equal to the price of basic residential measured rate service, excluding local
usage, in each state, up to a maximum discount of $10.20 per month (including all federal, state
and company contributions).
300. This condition not only applies to the subscriber eligibility, discounts and eligible
services features of the Ohio USA Lifeline plan, but it also includes certain other commitments.
Under the condition, Bell Atlantic/GTE will permit a Lifeline customer with past-due bills for
local service to restore local service after payment of no more than $25 and an agreement to repay
the balance of local charges in six equal monthly payments. Lifeline customers also will not be
required to pay a deposit for toll service if they elect toll restriction service. Bell Atlantic/GTE
will allow prospective Lifeline customers to verify their eligibility on a written form, and Bell
Atlantic/GTE will give those forms to state agencies that administer qualifying programs so that
the agencies can distribute the forms to their clients. Bell Atlantic/GTE also will negotiate with
state agencies administering qualifying programs to procure an on-line verification process.
Easing the financial burden for prospective Lifeline customers, Bell Atlantic/GTE will provide
both a toll-free telephone number for prospective customers to inquire about or subscribe to the
program and a toll-free fax line for customers to send program documentation, and new
customers will not be required to pay a deposit to obtain local service. Bell Atlantic/GTE will
publicize the program in each state with an annual promotional budget that is proportional to the
annual promotional budget in Ohio. In addition to including Lifeline information on customer
service center voice response units where technically possible and appropriate, Bell Atlantic/GTE
also will automatically upgrade current Lifeline customers to the new program where it is evident
that doing so will unambiguously improve the customer's situation. For each state that accepts
Bell Atlantic/GTE's offer, the merged firm will maintain the plan for a period of not less than 36
months.
301. We reject the request of the State Advocates that we expand subscriber eligibility
criteria to include all households with income below 150 percent of the federal poverty level, and
that we remove restrictions on the purchase of optional services. As the Applicants respond,
states will continue to have the right to establish eligibility requirements for lifeline service as well
as determine whether lifeline customers are eligible to subscribe to optional services. As for the
subscriber eligibility requirements themselves, our rules establish eligibility criteria for states that
have not established their own, and the eligibility criteria in our rules fall within the criteria in the
Ohio USA Lifeline plan. Furthermore, we believe that the eligibility criteria alternative
presented by the State Advocates will be difficult to verify. We find that the Applicants'
commitment to offer states an enhanced Lifeline plan will provide substantial direct benefits to
low-income residential consumers, and thus, we see no need to add further requirements to the
condition.
302. Additional Service Quality Reporting. As a safeguard against potential
deterioration in Bell Atlantic's or GTE's quality of service as a result of the merger, and to
promote affirmative service quality improvements, this condition requires Bell Atlantic/GTE to
report additional benchmark and service-quality information. First, Bell Atlantic/GTE will
report, on a quarterly basis, the quality of service that it provides to customers. Specifically, Bell
Atlantic/GTE will develop and file with this Commission, and post on a Bell Atlantic/GTE
website or provide to the relevant state commissions, quarterly state-by-state service quality
reports in accordance with the National Association of Regulatory Utility Commissioners
(NARUC) Technology Policy Subgroup's November 1998 "Service Quality White Paper."
Through this reporting program, Bell Atlantic/GTE will make publicly available in a timely
manner key information about its service quality, including installation and repair performance,
switch and transmission facility outages, consumer complaints, and answer time performance.
We anticipate that, by providing consumers and states with information about Bell Atlantic/GTE's
service quality, this condition will, at a minimum, deter any potential service quality degradation
and motivate the merged firm to improve its service quality where possible.
303. Bell Atlantic/GTE will also file reports showing the service quality provided to
interexchange carriers, which will include data regarding the installation and maintenance of
switched, high speed special, and special access services. By receiving such information on a
quarterly basis, the Commission and others can take appropriate action in the event such reports
show service quality degradation. Bell Atlantic/GTE also will continue reporting ARMIS data
on an operating-company basis in order to preserve the number of observable points of operating-
company behavior for benchmarking purposes.
304. In addition, as described above, we require the merged entity to report, on a
disaggregated, company-specific basis certain measurements, all but one of which it currently
provides as part of the Commission's ARMIS requirements With respect to its provision of
high-speed special access and regular special access services, we require Bell Atlantic/GTE, or
any applicable affiliate to report: the percent of commitments met; the average interval (in
days); the average delay days due to lack of facilities the average interval to repair service (in
hours) and the trouble report rate. These measurements should be reported on a monthly basis
and made available to the independent auditor It is our expectation that this condition will
ensure that any attempt by the merged entity to discriminate in favor of Genuity in the provision
of these special access services will be readily detectable.
305. NRIC Participation. Through this condition, we expect that Bell Atlantic/GTE
will demonstrate and further its commitment to maintain reliable, high-quality networks and
services, as well as to promote the deployment of advanced services. The Applicants will
continue their participation in the Network Reliability and Interoperability Council (NRIC), a
committee organized to make recommendations to the Commission on how to ensure "optimal
reliability, interoperability and interconnectivity of, and accessibility to, the public
telecommunications networks," and also to advise the Commission on spectrum compatibility
standards and spectrum management practices for the deployment of advanced services
technologies." Bell Atlantic/GTE's continued participation will provide assurance that the
merged firm will review the causes of network outages and advise on spectrum compatibility
standards and spectrum management practices in a timely manner, and adopt industry best
practices designed to promote reliable, high quality services.
1. Ensuring Compliance with and Enforcement of these Conditions
306. The Commission is firmly committed to enforcing the Communications Act and the
public interest standard that forms its foundation. Attaching conditions to a merger without an
efficient and judicious enforcement program would impair the Commission's ability to protect the
public interest. The conditions therefore establish compliance and enforcement mechanisms that
not only will provide Bell Atlantic/GTE with a strong incentive to comply with each of its
requirements, but also will facilitate the Commission's oversight of the Applicants' obligations
under these conditions. As a general matter, the conditions place the responsibility of taking
active steps to ensure compliance on Bell Atlantic/GTE by: (1) establishing a self-executing
compliance mechanism; (2) requiring an independent audit of the Applicants' compliance with the
conditions; and (3) providing self-executing remedies for failure to perform an obligation.
307. Compliance Program. For the benefits of the conditions to outweigh the potential
public interest harms of the merger, Bell Atlantic/GTE must take aggressive steps to implement
every aspect of these conditions and to comply with both the letter and the spirit of its obligations.
In our view, the benefits of these conditions depend entirely upon the Applicants' compliance.
Because the conditions that we adopt today are spelled out in detail with their satisfaction
measured by objective criteria, and because failing to comply with the conditions could expose
Bell Atlantic/GTE to a material loss of revenue, we believe that Bell Atlantic/GTE has a strong
incentive to implement an aggressive and effective compliance program.
308. As part of the conditions, Bell Atlantic and GTE will establish a corporate
compliance program to identify all applicable compliance requirements, establish and maintain the
internal controls needed to ensure compliance, evaluate the merged firm's compliance on an on-
going basis, and take any corrective actions necessary to ensure full and timely compliance. Bell
Atlantic/GTE will appoint a "Compliance Officer" with sufficient rank and experience to supervise
its corporate operations and to ensure that the business units carry out their responsibilities under
the conditions. This Compliance Officer will prepare and publicly file with the Commission an
initial compliance plan and an annual compliance report addressing the corporation's compliance
with the conditions and the sufficiency of the corporation's internal controls for ensuring
continued compliance.
309. We expect that Bell Atlantic and GTE will put into place a reasonably designed,
implemented, and self-enforced compliance program that will detect potential noncompliance in
time for Bell Atlantic/GTE to notify the Commission and take corrective action before such
noncompliance impairs the benefits of these conditions. To provide additional assurances to the
public regarding Bell Atlantic/GTE's compliance, however, the Commission plans to conduct
targeted audits of various aspects of the Applicants' compliance programs. Only a strong
corporate compliance program, in conjunction with the independent audit and other enforcement
mechanisms, will enable consumers to realize the full benefit of the conditions.
310. Independent Auditor. Because the public interest benefit of these conditions
depends entirely upon Bell Atlantic/GTE's compliance, the conditions also establish an
independent oversight program. Bell Atlantic and GTE will retain an independent auditor to
conduct an annual audit to provide a thorough and systematic evaluation of Bell Atlantic/GTE's
compliance with the conditions and the sufficiency of Bell Atlantic/GTE's internal controls. We
have ample experience using independent audits to supplement our usual investigative
authority, and have extensive experience with this method for ensuring compliance with our
rules. Independent audits, combined with targeted on-site audits conducted by Commission staff
and thorough reviews of the auditor's working papers, have proven largely successful in ensuring
compliance with the Commission's rules.
311. Although the independent audit will provide a systematic means of evaluating Bell
Atlantic/GTE's compliance, we are aware of inherent limitations in the audit process. Most
notably, an independent audit does not guarantee discovery of noncompliance or illegal acts.
Accordingly, an auditor's report that fails to note any exceptions does not preclude potential
enforcement action.
312. Acting pursuant to its delegated authority, the Common Carrier Bureau will
approve the independent auditor and oversee the conduct of the independent audit, which will
include reviewing the scope and quality of the auditor's work. The independent auditor's final
report, which will be publicly available, will contain sufficient detail for the Commission and the
public to understand the extent of the auditor's testing and evaluation procedures. In addition,
the findings in the auditor's report, or the review of the auditor's working papers, could form the
basis of enforcement actions. Bell Atlantic/GTE and the independent auditor also will meet for
a post-audit conference to assess the conduct of the audit and the need for any modifications to
the audit program. Based on these requirements, we find that the conditions provide for effective
Commission oversight of the audit process and a mechanism for revising the audit programs and
procedures based on our experience over time.
313. In addition to examining compliance with the market-opening conditions described
in this section, the Applicants' proposal also calls for the independent auditor to examine their
Internet spin-off proposal. In particular, the auditor will examine Bell Atlantic/GTE's
implementation of the Internet spin-off proposal, as well as their post-merger dealings with the
spin-off entity, Genuity. In this way, the Applicants' proposal ensures that the Commission and
the public receive reasonable assurances that the spin-off will occur in strict accordance with the
terms specified herein, and that the merged entity will not engage in any post-merger misconduct
that could undermine our conclusions in this order.
314. The independent auditor will conduct its examination in accordance with the
standards of the American Institute of Certified Public Accountants ("AICPA"). Specifically,
the independent auditor will conduct a "compliance attestation," which requires issuing a report
that "expresses a conclusion about the reliability of a written assertion that is the responsibility of
another party." For most conditions, the independent auditor will conduct this examination
using the "examination engagement" method to evaluate Bell Atlantic/GTE's compliance, and
to issue a "positive opinion" (with exceptions noted) in its final report. The conditions, however,
require the more thorough "agreed-upon procedures" engagement to evaluate Bell
Atlantic/GTE's compliance with the separate advanced services affiliate requirements. In this
way, the conditions emulate the Federal-State joint audit required by section 272(d).
315. The independent audit requirement establishes an efficient and cost-effective
mechanism for providing reasonable assurances of Bell Atlantic/GTE's compliance with its
obligations under the conditions. Bell Atlantic/GTE is required to inform the auditor of its
progress at meeting the specific deadlines and requirements set forth in the conditions, which will
enable the independent auditor to detect potential noncompliance in a timely manner. Pursuant to
its obligations as the designated auditor, the independent auditor will notify the Commission
immediately of the problem areas and any corrective action undertaken. By requiring Bell
Atlantic and GTE to pay for the audit, the conditions place the costs of compliance on the
Applicants instead of their competitors or taxpayers. We note that, pursuant to our regulatory fee
schedule, Bell Atlantic/GTE will reimburse the U.S. Treasury for any review and audit work
performed by the Commission staff.
316. We recognize that the state commissions have valuable insight into on-going issues
and problems in the telecommunications industry, and we stress that the Commission will work
closely with the state commissions regarding Bell Atlantic/GTE's compliance with these
conditions. Pursuant to long-standing delegated authority, we expect the Common Carrier
Bureau to cooperate with state commissions by coordinating compliance and enforcement
activities and sharing information gathered in the course of audits. Moreover, we note that,
under the conditions, Bell Atlantic/GTE will ensure that the independent auditor provides access
to its working papers to state commissions, thereby ensuring that state commissions can perform
their own reviews of the audit work concerning the conditions.
317. Voluntary Payment Obligations. For many of the conditions, the Applicants
proposed a voluntary incentive payment structure, which could expose Bell Atlantic/GTE to
significant financial liability, if the merged firm fails to satisfy an obligation in a timely manner.
For example, as described above, under its out-of-region competition commitment, Bell
Atlantic/GTE will make voluntary incentive payments, valued at a maximum of $750 million, for
missing the targets specified in the condition. In addition, Bell Atlantic/GTE will incur similar
voluntary payment obligations for failing to provide service to competitive LECs that meets the
standards of the Carrier-to-Carrier Performance Plan (up to a total of $1.64 billion over three
years, with an offset for early OSS deployment), and for failing to meet the deployment schedule
for its OSS enhancements (up to a total of $20 million). We expect that the size and scope of
these potential voluntary payments will provide a strong incentive for Bell Atlantic/GTE to ensure
that it fully complies with both the letter and the spirit of the conditions. The conditions
recognize that Bell Atlantic/GTE is strictly liable for making any and all payments arising out of
its nonperformance. Moreover, failing either to satisfy the underlying obligation or to make
timely voluntary payments will subject the Applicants to potential liability in the same way Bell
Atlantic/GTE would be liable for violating any other Commission order, rule, or regulation.
318. We expect that Bell Atlantic/GTE will take all necessary measures, such as
amending tariffs and interconnection agreements, to give the conditions their full legal effect in a
timely manner. Although we note that the Commission may grant an extension of time for a
requirement under the conditions, Bell Atlantic/GTE bears a heavy burden of demonstrating good
cause. We expect that this heavy burden of persuasion, coupled with the compliance
mechanisms and significant financial exposure, will ensure that the public enjoys the full benefits
of these conditions in a timely manner. We also expect that the self-executing remedial measures,
such as Bell Atlantic/GTE's voluntary incentive payment obligations, will limit any delay arising
from extensive litigation arising from potential violations.
319. Other Mechanisms. We emphasize that the enforcement and compliance
programs established in these conditions in no way supersede or replace the Commission's
enforcement and investigative powers, but merely supplement our usual processes. The
Commission may, at its discretion and subject to its normal procedures, take additional
enforcement action against Bell Atlantic/GTE for failing to comply with any provision of this
Order, including extending the sunset provisions, imposing fines and forfeitures, issuing cease-
and-desist orders, modifying the conditions, awarding damages, or requiring appropriate
remedial action. In addition, members of the public may pursue a claim in accordance with either
section 207 or section 208 of the Act. We do not expect that any enforcement penalties or
compliance mechanisms will become merely an acceptable cost of doing business, and we note
that the conditions require all such costs to be excluded from Bell Atlantic/GTE's rates. In this
way, the enforcement plan rightly ensures that consumers will not be forced to bear the costs of
Bell Atlantic/GTE's mistakes.
320. Sunset. Unless otherwise specified, each obligation under these conditions will
sunset after 36 months of benefit, which may be tolled or extended by the Commission for a
period of time commensurate with any noncompliance by Bell Atlantic/GTE. Maintaining a full
three-year period of benefit is critical for the conditions to ameliorate the potential public interest
harms of the merger. Thus, in the event that Bell Atlantic/GTE fails to comply fully with its
obligations, the Commission may, in its discretion, either on its own motion or in response to a
petition, toll the effective sunset date of the relevant condition, and related conditions, to ensure
that the public enjoys the full three-year term of the benefits.
321. Effect of The Conditions. As discussed above, these conditions are intended to be
a floor and not a ceiling. The Applicants must abide by state rules, even though the rules may
touch on identical subjects, unless the merged entity would violate one of these conditions by
following the state rule. The conditions are also not intended to limit the authority or jurisdiction
of state commissions to impose or enforce additional requirements stemming from a state's review
of the proposed merger. To the extent that a requirement in these conditions duplicates a
requirement imposed by a state such that these conditions and state conditions grant parties
similar rights against Bell Atlantic/GTE, the affected parties must elect either to receive the
benefit under either these conditions or state law. For example, Bell Atlantic/GTE will not be
required to provide two promotional loop discounts simultaneously for the same loop. If, on the
other hand, Bell Atlantic/GTE fails to meet a stated performance standard under the Carrier-to-
Carrier Performance Plan for a measurement that is replicated in a state performance plan, Bell
Atlantic/GTE would face repercussion under both plans.
322. Although the merged firm will offer to amend interconnection agreements or make
certain other offers to state commissions in order to implement several of the conditions, nothing
in the conditions obligates carriers or state commissions to accept any of Bell Atlantic/GTE's
offers. The conditions, therefore, do not alter any rights that a telecommunications carrier has
under an existing negotiated or arbitrated interconnection agreement. Moreover, the Applicants
also agree that they will not resist the efforts of state commissions to administer the conditions by
arguing that the relevant state commission lacks the necessary authority or jurisdiction.
A. Benefits of Conditions
323. We conclude that, with the conditions that we adopt in this Order, the merger of
Bell Atlantic and GTE is likely to be beneficial for consumers and spur competition in the local
and advanced services markets. Given that the conditions will substantially mitigate the potential
public interest harms of the proposed merger and will result in affirmative public benefit, we
conclude that the Applicants have demonstrated that the proposed merger, on balance, will serve
the public interest, convenience and necessity.
1. Mitigating Harm from Loss of Potential Competition
324. As noted above, the proposed merger will remove, in many local markets
throughout Bell Atlantic's and GTE's territories, a current competitive threat and the significant
potential for a future entrant. Armed with the inside knowledge of how to overcome roadblocks
to local competition, Bell Atlantic and GTE are especially qualified to compete successfully
against other incumbent LECs.
325. We find that, while not substituting fully for the loss of direct competition between
Bell Atlantic and GTE, the conditions we adopt will significantly mitigate any potential public
interest harms. After the merger, these conditions require the merged firm to open its markets to
others while at the same time entering markets outside of its region. Specifically, the conditions
require the merged Bell Atlantic/GTE to spend at least $500 million and/or provide service over
at least 250,000 lines as a competitive LEC, offering voice and/or advanced services, in out-of-
region markets starting at the merger's closing at completing the commitment within 36 months
thereafter. These conditions are punctuated by annual milestones during the commitment period,
under which Bell Atlantic/GTE must achieve at least 20 percent of each milestone through
providing service to residential customers or providing advanced services. Furthermore, the
Applicants have agreed to voluntary incentive payments totaling 150 percent of any shortfall in
their expenditures under these conditions. Thus, the merged firm will face notable economic
repercussion if it fails to achieve a certain level of entry into out-of-region residential and/or
advanced services markets according to a specified implementation schedule. These benefits to
some extent counterbalance the loss of direct competition between Bell Atlantic and GTE,
particularly if the outcome of Bell Atlantic/GTE's implementation of the conditions is faster
retaliation within its home region by the incumbent LECs whose home territories the merged firm
invades.
326. Further, by reducing the risk and costs associated with entry into Bell Atlantic and
GTE territories, particularly with respect to residential and advanced services markets, other
conditions stimulate entry into these markets, thereby offsetting the loss of potential competition
between the Applicants resulting from the merger. Several conditions lower the entry barriers in
the Bell Atlantic and GTE regions, especially for residential competition. For example, we
anticipate that the carrier-to-carrier promotions for residential service will spur other entities to
enter these markets and establish a presence in residential markets that can be sustained after
expiration of the promotional discounts. In addition, Bell Atlantic/GTE's most-favored nation
obligations, which cover certain arrangements that the company obtains as a competitive LEC
outside its region as well as arrangements imported from other in-region states, and its agreement
to enter into multi-state interconnection agreements should assist competitors in entering new
markets within the Bell Atlantic/GTE region. Similarly, the Carrier-to-Carrier Performance Plan
will provide competing carriers with additional protections by strengthening Bell Atlantic/GTE's
incentive to provide quality of service at least equivalent to the merged firm's retail operations or
a benchmark standard. These conditions and others make competition in Bell Atlantic/GTE's
region more likely, thereby offsetting in part the competitive threat that each Applicant posed to
the other.
1. Mitigating Harm from Loss of Benchmarks
327. As indicated above, by removing a major incumbent LEC, the merger of Bell
Atlantic and GTE would result in fewer sources of diversity and experimentation at the holding
company, operating company, and industry level from which regulators and competitors could
draw comparisons particularly useful in implementing the 1996 Act's pro-competitive mandates.
We doubt that any set of conditions could substitute fully for the loss of one of the few remaining
major incumbent LEC benchmarks. The harm from diminution of the field for such comparative
practices analyses, however, to some extent is mitigated by conditions that entail the spread of
best practices throughout the merged firm's service areas, or that require the reporting of
information regarding the incumbent's networks and performance that is useful to regulators and
competitors.
328. We anticipate that several conditions will require the merged firm to spread best
practices throughout its region, viewed as a whole or as two distinct parts based on legacy Bell
Atlantic and GTE service areas. Significantly, "best practices," as we use the phrase here, will be
identified in full or in part by the Applicants' customers and regulators, not by Bell Atlantic and
GTE. In this regard, by affording competitive LECs input into Bell Atlantic and GTE's ultimate
OSS commitments under these conditions, the OSS collaborative process should lead to an
agreement that represents best practices. Specifically, the stipulation in the conditions that Bell
Atlantic/GTE and competitive LECs will seek to reach agreement on issues raised in
collaboratives, and that competitive LECs can request a collaborative process where none is
specified in the Plan of Record, offers assurance that the merged firm ultimately will take into
account practices of certain operating companies that other carriers have found useful or
beneficial in establishing the substance and implementation of OSS. In addition, the Applicants'
commitment to rely on OSS industry standards for application-to-application interfaces, data
formatting specifications, and transport and security protocols entails extending best practices, as
determined by industry consensus standards groups, throughout the Bell Atlantic/GTE region.
329. The conditions requiring Bell Atlantic/GTE to continue participation in the NRIC
similarly will encourage best practices based on industry concordance. The NRIC, whose
composition represents a balancing of industry interests, issues periodic reports concerning the
reliability of public telecommunications network services, and regularly compiles detailed lists of
industry best practices designed to reduce the number and scope of network outages. Through its
continued participation in the NRIC, we fully expect Bell Atlantic/GTE to study and, to every
extent possible, implement the industry best practices for network reliability. In this way, we
anticipate that Bell Atlantic/GTE will be able to, at a minimum, maintain a high state of reliability
after the merger and take aggressive steps to address network reliability in those areas where the
company may need improvement.
330. Other examples of conditions that we anticipate will require the merged entity to
spread best practices include the uniform OSS change management process, most-favored nation
provisions, and Lifeline plan. Bell Atlantic/GTE will adopt in each of its states the current Bell
Atlantic change management process originally developed through collaboratives with
competitive LECs in New York. As we note above, competitive LECs favor implementation of
this change management process, and they may seek to improve it even further through the
collaborative process. Both the out-of-region and in-region most-favored nation requirements
are designed explicitly to assure carriers some ability to obtain beneficial arrangements, whether
specifically requested by Bell Atlantic/GTE as an out-of-region competitor or simply offered by
the firm in an in-region state, throughout the merged firm's service area. And the merged firm
will offer to each of its in-region states a Lifeline plan based on features of the Ameritech Ohio
plan.
331. Aside from the spread of best practices, the conditions also help ameliorate any
potential loss of observable information to regulators and competitors. In particular, the Carrier-
to-Carrier Performance Plan will generate valuable information for regulators and competitors for
use in implementing and enforcing the Communications Act. The Performance Plan is even more
beneficial with respect to measuring the performance of the GTE legacy companies because, as a
non-BOC, GTE is not subject to a performance plan arising typically from the process of seeking
authority to provide in-region, interLATA services under section 271. Moreover, the GTE-
specific performance plan in California notwithstanding, GTE may not otherwise be subject to
performance plans at the state level. The merged firm will also continue to report ARMIS data
separately for each of its operating companies, and will now report such data on a quarterly basis.
The requirement that the Applicants develop and file state-by-state service quality reports in
accordance with the recommendations of the NARUC Technology Policy Subgroup will facilitate
comparative practices analysis by providing additional data for this Commission and state
commissions in carrying out their statutory responsibilities and in detecting potential violations of
the Communications Act. The Applicants also are obligated under the conditions to provide
quarterly state-specific service quality reports regarding the quality of services provided to
interexchange carriers, and to file a statement of the cost savings associated with the merger.
332. In addition to spreading best practices and helping to redeem potentially lost,
valuable, observable information, some conditions will help to offset the potential loss of future
diversity and experimentation resulting from the merger. For example, through their out-of-
region competitive entry commitment, Bell Atlantic and GTE could deploy, and experiment in the
provision of, different forms of advanced services. Or, Bell Atlantic/GTE could put into service
in out-of-region markets some of the $550 million in dark fiber that Bell Atlantic has committed
to lease from Metromedia Fiber Network, Inc., in which Bell Atlantic also has a substantial equity
investment. Though the Applicants, notwithstanding the aforementioned examples of what they
could do, do not specify precisely how they will fulfill their out-of-region competitive entry
commitment, this lack of precision is due to their wanting, as a merged firm, "to be able to invest
in the newest technologies available to compete in the local market and provide innovative
services and options to its new customers."
1. Mitigating Harm from Potential Increased Discrimination
333. We find that several commitments will alleviate the concern that the merged firm
will use its combined size and market power to discriminate more effectively against its rivals in
its in-region markets for local services as well as advanced services. The conditions that we adopt
today are carefully targeted at the types of discrimination the merger was otherwise most likely to
engender. Moreover, they substantially reduce entry barriers to the merged entity's region.
334. The combined entity's incentive to discriminate, stemming from its larger
geographic footprint, is especially likely, if left unchecked, to translate into an ability to
discriminate against the provision of advanced services. The requirements that the merged firm
provide such services through a separate affiliate, and comply with reporting and performance
obligations, decreases the ability of Bell Atlantic/GTE to discriminate successfully, and thereby
neutralizes some of Bell Atlantic/GTE's increased incentive to discriminate with respect to
advanced services. Significantly, the merged entity will have to treat rival providers of advanced
services the same way that it treats its own separate advanced services affiliate.
335. We expect that some conditions, most notably the line sharing, collocation and
UNE compliance audits, also should lead to reduction of the costs and uncertainty of providing
advanced services in Bell Atlantic/GTE's region, and thereby remedy to a certain extent any
effects of increased discrimination for national competitive LEC entrants. Similarly, the
Applicants' commitments to establish uniform advanced services and other OSS interfaces
between their service areas in Pennsylvania and Virginia also should reduce somewhat the costs
and other barriers that local or advanced services competitors face in entering within these states.
336. The Carrier-to-Carrier Performance Plan also partially alleviates the Applicants'
increased incentive and ability to discriminate against rivals following the merger. By requiring
the merged firm to report results of 18 performance measures, and achieve the agreed-upon
standard or voluntarily make incentive payments, the plan provides heightened incentive for the
company not to discriminate in ways that would be detected through the measures. Competing
carriers operating in or contemplating entry into Bell Atlantic/GTE territory will have an increased
measure of confidence that the company will not engage in discrimination that would be detected
through such measures. Moreover, if the results reveal unequal treatment, the voluntary payment
scheme will create a direct economic incentive for Bell Atlantic/GTE to cure performance
problems quickly.
337. The Carrier-to-Carrier Performance Plan is designed specifically to permit
monitoring for discriminatory conduct in Bell Atlantic/GTE's provision of elements and services
utilized in providing advanced services. For instance, the line sharing provisioning measurement
or sub-measurement that Bell Atlantic/GTE is required to propose and implement after the merger
closing date is designed specifically to address the needs of advanced services providers. For
many of the other measures, data will be reported distinctly for DSL loops. The availability of
this information will assist entities that are contemplating providing advanced services in the Bell
Atlantic/GTE region, as well as helping carriers already operating in the region to monitor and
address any potential increased discrimination.
338. As explained above, with Bell Atlantic's new access to customer accounts in
GTE's region (e.g., New York business customers with branch offices in Los Angeles), and vice-
versa, the merged firm gains an advantage in servicing multi-location business customers.
Allowing competitors to import most-favored nation arrangements across Bell Atlantic/GTE's in-
region states helps to safeguard against this increased potential for discrimination while reducing
the merged firm's advantage of servicing multi-location customers. Furthermore, the
Applicants have bolstered the strength of the most-favored nation commitments themselves by
permitting carriers to opt into arbitrated as well as voluntarily negotiated agreements.
339. The enforcement mechanisms contained in these conditions also will aid in the
detection of discriminatory behavior by Bell Atlantic/GTE. In particular, the conditions require
the more thorough type of audit, an agreed-upon procedures engagement, for the separate
advanced services affiliate provisions. Like the section 272(d) audit, the independent auditor will
conduct a systematic and thorough examination into Bell Atlantic/GTE's compliance with the
structural, transactional, nondiscrimination and other requirements of the separate advanced
services affiliate. By pushing the due date of the independent auditor's separate affiliate
compliance report to four months earlier than the due date committed to by SBC/Ameritech,
the audit provisions in Bell Atlantic/GTE's conditions yield a greater benefit in that they expedite
the availability to regulators and competitors of precious information for detection of
discriminatory behavior.
1. Additional Benefits from Conditions
340. While these conditions mitigate, in many important ways, the potential public
interest harms of the proposed transaction, we also find that the conditions will result in
affirmative public interest benefits that tip the public interest balance of the proposed transaction
in the Applicants' favor. Collectively, these conditions will, we believe, create momentum for
increasing competition and choice in telecommunications markets inside and outside Bell
Atlantic's and GTE's territories.
341. As an initial matter, nearly all of the obligations under the conditions apply
throughout Bell Atlantic's and GTE's in-region states, and others even extend to markets outside
of the companies' traditional service areas. Because our public interest analysis is not limited to
potential public benefit within a select geographic area or market, but also considers potential
public interest benefits of applying conditions such as those imposed in this Order to a wider area,
the breadth of the conditions helps the Applicants in carrying their burden of demonstrating how
the merger advances competition.
342. We also find it significant that the conditions in general will last for a 36-month
period. As addressed in the conditions, the duration of each commitment is tied to the initiation
of the benefit of the condition. In other words, each of the conditions is designed to provide 36
months of benefit once its embedded obligations take effect. So, for instance, Bell Atlantic/GTE
must provide unaffiliated carriers in its service areas with access to the OSS interfaces set forth in
the conditions and agreed-upon enhancements for at least 36 months after such interfaces and
enhancements are deployed. In the fast-changing world of telecommunications industries, these
commitments, in our judgment, will last for a sufficient period to have real impact, but not so long
as to threaten imposing obsolete responses to future issues.
343. Fostering Out-of-Territory Competitive Entry. GTE already has an established
and operational competitive LEC with approximately 60,000 local customers outside its local
service territory, and has invested significant sums in OSS and other assets needed to compete
outside its traditional local service areas. While these conditions thus do not alter the basic fact
that the parties do not need to merge in order to form out-of-region competitive LECs, the
conditions do, however, reinforce the likelihood and increase the magnitude of a post-merger out-
of-region entry strategy. These certainly enhance the public interest.
344. Lower Entry Barriers for Residential Competition. In broad terms, we anticipate
that the conditions will prove beneficial in jumpstarting residential competition by lowering entry
barriers for residential competition. For instance, the carrier-to-carrier promotions are designed
specifically to induce more entry into residential markets quickly. Other conditions, such as those
regarding collocation and UNE compliance, Carrier-to-Carrier Performance Plan, most-favored
nation arrangements, and multi-state interconnection agreements will, in our judgment, greatly
reduce the costs of entry over the long run. In addition, the commitment to reform the process of
cabling new multi-tenant dwellings and business properties will increase access to customers by
competitors not otherwise relying on the incumbent's wireline network.
345. Accelerating Advanced Services Deployment. Several conditions are aimed at
increasing the availability of and broadening choices for advanced services for all Americans. The
extensive commitments regarding advanced services all help to attain a single overriding goal: to
encourage entry into the provision of advanced services by numerous firms, as well as the
Applicants, while protecting against the risk that Bell Atlantic/GTE might cripple these services in
their infancy by discriminating against rival advanced services providers. The provisions for
expediting cost proceedings and immediately making available rates, conditions, and terms for
conditioning xDSL loops, for a separate affiliate for the Applicants' provision of advanced
services, including advanced services unbundled loop discounts for competitors tied to threshold
use by the separate affiliate of certain advanced services OSS interfaces, for a line sharing
compliance plan, and for a surrogate line-sharing discount in the event our line sharing rules are
overturned in a final, non-appealable judicial decision will reduce the costs, including the risks, of
entering these markets. In addition, the out-of-region competitive entry milestones established by
the Applicants include a commitment to devote at least 20 percent of the expenditures or
deployed customer lines towards providing advanced services or residential competitive local
service.
346. Improving Service to Residential and Low-Income Consumers. Low-income
consumers, in rural and urban areas alike, will realize direct benefits from the enhanced Lifeline
plans offered to them and from the assurance that they will share in the benefits of new advanced
services offerings. Moreover, through the Applicants' additional service quality reporting, the
Commission, states, and consumers will have information needed to monitor the merged firm's
service quality on a timely basis.
A. Other Requested Conditions or Modifications to Proffered Conditions
347. Access to Advanced Services Loop Information. In approving the merger between
SBC and Ameritech, we adopted conditions designed to promote rapid deployment of advanced
services by ensuring that carriers have nondiscriminatory access to certain specified information
for loop qualification purposes, in order to make informed decisions about whether and how they
can provide advanced services to a customer at a given location. Certain commenters request
that we adopt the same requirements with respect to Bell Atlantic/GTE. We agree with the
Applicants, however, that such conditions are unnecessary in the instant merger because,
subsequent to our adoption of the SBC/Ameritech merger, we addressed this issue in the UNE
Remand Order and imposed appropriate requirements.
348. Restructuring of OSS Charges. Other conditions that we adopted in approving the
merger between SBC and Ameritech included requirements that the merged firm recover
electronic OSS costs on a strict usage basis rather than through a flat monthly fee, thereby
eliminating any flat-rate, up-front charge for the right to use the company's standard electronic
interfaces for accessing OSS. We explained that such conditions were necessary to that merger
because SBC charged a flat monthly fee for access to electronic OSS, and commenting parties
feared that SBC would spread this practice to Ameritech's region following the merger.
BlueStar et al. and NALA request that such conditions likewise be applied to Bell
Atlantic/GTE. Because those factual circumstances are not present in the instant merger,
however, we find that such conditions are not warranted here.
349. UNE Platform. We adopted, in approving the merger between SBC and
Ameritech, carrier-to-carrier promotions pursuant to which SBC/Ameritech would offer end-to-
end combinations of all network elements required to be unbundled as of January 24, 1999
(including the UNE platform) to competitive LECs providing residential local service. Some
commenters maintain that the conditions to the instant merger likewise should include these UNE
platform conditions. We agree with the Applicants, however, that we need not attach to Bell
Atlantic/GTE conditions relating to UNE platform promotions, because the UNE Remand Order,
which we adopted subsequent to our approval of the SBC/Ameritech merger, confirms that
incumbent LECs are required to make the UNE platform available to competitive LECs.
Moreover, we decline to adopt, in the context of this merger, other requirements that commenters
seek for us to impose on Bell Atlantic/GTE relating to provision of the UNE platform. We
note that the comprehensive UNE compliance audit that the Applicants have agreed to undergo as
a condition to the instant merger should reveal any noncompliance with the Commission's
unbundling requirements.
CCCL. Mobile Communications Services
351. We find that the proposed merger will be pro-competitive in its effects on wireless
communications markets. In particular, this merger will promote competition in markets for
mobile voice telephone services by extending the reach of a major nationwide service provider in a
business in which national coverage is becoming more vital to compete effectively. The
wireless service areas of the merging parties are largely complementary, and the companies
employ compatible technologies. Upon consummation of this merger, Verizon Wireless
(consisting of the U.S. wireless properties of Bell Atlantic, GTE, and Vodafone) will have a
licensed footprint potentially serving 232 million people and 96 of the 100 largest U.S. cities. The
new entity will have more than 24 million cellular and broadband PCS and four million paging
customers.
352. Moreover, combining these wireless businesses will likely produce cost savings
and operating efficiencies by reducing the Applicants' collective dependence on costly roaming
agreements. The combination should also produce system-wide efficiencies through common
network engineering, management, purchasing, and administrative functions, leading to earlier and
broader deployment of advanced wireless services.
A. Licenses and Service Offerings
353. On April 3, 2000, pursuant to Commission approval, Bell Atlantic combined its
domestic cellular and other wireless businesses with most of the U.S. wireless and paging
operations of Vodafone. The combined entity, doing business as Verizon Wireless, operates
cellular and broadband PCS systems in 48 states and the District of Columbia capable of serving
194 million people. Verizon Wireless also provides one-way and two-way paging services in
numerous states and holds interests in fixed point-to-point microwave, business radio, and
wireless communications service (WCS) licenses.
354. GTE operates cellular and broadband PCS systems in 18 states, covering
approximately 74 million potential subscribers. GTE also holds interests in licenses for other
wireless services, including paging, fixed point-to-point microwave, business radio, experimental,
rural radio, air-to-ground, and telephone maintenance radio service. Applications to transfer
control of the entities holding these licenses from GTE to Bell Atlantic were filed with the
Commission on October 2, 1998 and March 1, 8, and 9, 2000.
A. Analysis of Potential Competitive Harms
1. Overlapping Ownership Interests
355. While the wireless interests held by Verizon Wireless and GTE are to a large
degree complementary, their respective properties overlap in numerous areas. Absent divestiture,
many of these overlaps would violate certain Commission rules and raise the possibility of
competitive harms in mobile voice telephony, in particular. In 19 markets, absent divestitures,
Verizon Wireless and GTE together would hold a financial interest in both channel blocks in
overlapping cellular service areas, implicating the Commission's cellular cross-ownership rule in
those markets in which both parties' ownership interests exceed five percent. These strictly
cellular overlaps are concentrated in California, Ohio, South Carolina, and a fourth group
spanning several southwestern states.
356. In 77 other markets, Verizon Wireless and GTE currently hold interests in cellular
and PCS licenses covering the same areas, potentially implicating the Commission's CMRS
spectrum aggregation rule. A first collection of these overlaps involves cellular properties held
by GTE and PCS properties formerly operated by PrimeCo Personal Communications, L.P
(PrimeCo). These overlaps principally involve properties in Florida, Texas, Virginia, and the
greater metropolitan Chicago area, as well as one in Alabama. Another collection of overlaps
involves GTE's PCS properties and cellular businesses formerly operated by Vodafone centered
in Ohio and Washington state. Several additional overlaps arise out of Vodafone's recent
acquisition of certain CommNet Cellular businesses in Idaho and Montana.
357. As discussed in detail below, the parties have committed to eliminate all existing
overlaps of cellular and/or PCS properties to comply with the Commission's cellular cross-
ownership and spectrum aggregation rules as well as the terms of a court-ordered Consent Decree
between the parties and the U.S. Department of Justice ("DOJ").
1. Revised Consent Decree
358. On December 6, 1999, the DOJ filed with the United States District Court for the
District of Columbia a Revised Consent Decree negotiated with Bell Atlantic, Vodafone, and
GTE that requires the divestiture of overlapping wireless businesses in 96 markets in 15 states.
On April 18, 2000, the court approved the Revised Consent Decree, which replaces an earlier
divestiture agreement reached in May 1999 among DOJ, Bell Atlantic, and GTE. The Revised
Consent Decree requires the divestiture of one wireless business in any market in which the
companies' licenses overlap, even in cases in which the Commission's rules are not implicated.
359. The Revised Consent Decree is intended to ensure that the creation of the
proposed national wireless network will not increase concentration in any geographic market, and
establishes a schedule by which required divestitures are to be consummated. Where overlaps
involve strictly cellular properties, businesses (including licenses and facilities) are to be divested
prior to or concurrently with consummation of the merger. In other cases involving
PCS/cellular overlaps, businesses are to be divested prior to or concurrently with consummation
of the merger, or by June 30, 2000, whichever is later. In either case, the Revised Consent
Decree requires Applicants to divest not just spectrum but facilities sufficient "to ensure that the
divested wireless businesses remain viable, ongoing businesses." Under the terms of the
Revised Consent Decree, the Applicants may request, and DOJ in its sole discretion may grant,
limited additional time to complete divestiture transactions involving the PCS/cellular overlap
properties. Therefore, it is contemplated under the Revised Consent Decree (without reference
to the requirements of our rules) that some PCS/cellular overlap divestitures may be completed
after consummation of the merger, perhaps not until 60 days following such consummation.
1. Compliance with CMRS Ownership Rules
360. Cellular Cross-Ownership Rule. Our rules prohibit an entity from holding
attributable interests in both cellular licenses in any cellular service area (or portions thereof).
Under the terms of the Revised Consent Decree, Bell Atlantic, Vodafone, and GTE have
committed to eliminate the 19 cellular-cellular overlaps that would be created by this merger prior
to, or concurrently with, consummation of the merger transactions. Fulfillment of these
commitments would achieve compliance with our cellular cross-ownership rule, with the caveat
that, under that rule, the divestitures of these cellular properties must be consummated before the
Bell Atlantic GTE merger may be consummated.
361. To resolve the cellular-cellular overlaps, the parties have sold, or have agreed to
sell, properties in 13 cellular markets to ALLTEL. On April 1 and May 15, 2000, Bell Atlantic
and Vodafone consummated the assignment of six cellular properties to ALLTEL. On June 12,
2000, we granted applications to assign an additional seven cellular properties to ALLTEL.
Finally, Applicants have filed applications to transfer into a divestiture trust the remaining six
cellular licenses. We condition grant of the underlying applications to transfer control of
licenses from GTE to Bell Atlantic on the consummation of the divestitures of these remaining
thirteen cellular properties prior to the consummation of the merger. Further, pursuant to our
rules, we delegate to the Wireless Telecommunications Bureau the authority to review the
divestiture trust agreement for compliance with our rules.
362. CMRS Spectrum Aggregation Rule. Under our CMRS spectrum aggregation rule,
a single entity is generally permitted to hold an attributable interest in up to 45 MHz of CMRS
spectrum in urban areas; in rural areas, an entity is generally permitted to hold up to 55 MHz of
spectrum. The PCS licenses involved in the overlaps that are created by the proposed merger
generally provide for authority over 30 MHz of PCS spectrum, while the cellular properties
encompass 25 MHz of spectrum. Further, in most of these cases involving PCS-cellular overlaps,
the Applicants' interests in these overlapping properties are attributable under our spectrum
aggregation rule. Therefore, in the majority of these cases, absent divestitures, the merged
entity would have attributable interests in licenses totaling 55 MHz of CMRS spectrum, which in
most of the cases involved here would exceed our spectrum aggregation limits.
363. Under the terms of the Revised Consent Decree, Bell Atlantic, Vodafone, and
GTE have committed to divest one wireless license and its associated business in each market in
which an overlap would occur, without regard to the size or nature of the current interests. In
addition, where our spectrum aggregation rule would permit the parties to keep a 25 MHz cellular
license and 20 MHz of PCS spectrum in the same market, the Revised Consent Decree only
permits the merged entity to keep 10 MHz of the PCS spectrum if it retains the cellular license.
364. The parties intend to divest these properties directly to third parties, but have also
requested authority to assign or transfer control of properties to the divestiture trust in the event
that agreements with third-party buyers cannot be completed in time to file applications with us
before consummating the underlying merger applications. We condition grant of the underlying
applications to transfer control of licenses from GTE to Bell Atlantic on compliance with our
spectrum aggregation rule. The Commission will separately rule on the parties' applications to
divest wireless properties.
1. Other Competitive Issues
a. Triton PCS and Sprint
365. Triton PCS, Inc. (Triton) claims that Bell Atlantic Mobile Services has behaved
anticompetitively with respect to Triton by filing a "groundless" lawsuit against Triton. Bell
Atlantic states that it filed suit against Triton to protect against disclosure of confidential
competitive information by former high-level Bell Atlantic Mobile employees that Triton hired.
This action is currently pending in the New Jersey Superior Court. We find that this is a civil
dispute not relevant to our analysis under section 310(d) authority and best resolved in a state
court of competent jurisdiction.
366. Triton and Sprint Communications Company (Sprint) both complain that Bell
Atlantic has engaged in anticompetitive roaming negotiations. We are currently considering in a
separate docket whether any action is necessary with respect to automatic roaming agreements
between PCS and cellular carriers. Accordingly, we decline to consider that issue in this
proceeding.
a. Commonwealth of the Northern Mariana Islands
367. The Commonwealth of the Northern Mariana Islands asserts that Bell Atlantic
affiliates have opposed the application of "rate integration" policy to CMRS carriers, and
proposes that the Commission require Bell Atlantic/GTE to maintain rate integration across all
subsidiaries and services, including wireless services. In a separate proceeding, we are currently
considering whether to forbear from, or reconsider, rate integration for CMRS carriers.
Therefore, we decline to consider this issue in this proceeding.
A. Conclusion
368. Based upon our review under section 310(d) of the Act, we determine that the
proposed transfers of control from GTE to Bell Atlantic will not likely result in harm to
competition in any relevant wireless market. We also determine that these transfers will likely
result in public interest benefits. We therefore conclude that, on balance, Applicants have
demonstrated that these transfers serve the public interest, convenience, and necessity.
Accordingly, we grant the Applications, subject to the conditions set forth herein.
CCCLXIX. International Issues
A. General
370. Consistent with our conclusion above that the proposed merger will not impact in
any significant way the market for domestic long distance services, and under the same reasoning,
we conclude that the proposed merger will not impact in any significant way the market for
international long distance services.
371. Our conclusion that the proposed merger will not impact in any significant way the
market for international long distance services is further supported by the absence of any evidence
in the record to demonstrate that the proposed merger would affect competition adversely in any
input market that is essential for the provision of international services, including the market for
international transport services.
372. For purposes of determining whether the merger would affect competition
adversely in any input market that is essential for the provision of international services, we focus
our analysis on submarine cable facilities. Bell Atlantic currently does not own any submarine
cable capacity in the Pacific Region or between the U.S. and the Caribbean and/or South
America. Therefore, Bell Atlantic's merger with GTE will not increase market concentration in
those regions, regardless of the number of cable facilities GTE owns in those regions. In the
Atlantic region, Bell Atlantic currently owns a de minimis amount of total available cable
capacity, and we project it will continue to own a de minimis amount of total available cable
capacity in the Atlantic region through 2001. GTE's current and projected (through 2001)
ownership of cable capacity in the Atlantic region is also de minimis. Therefore, upon
consummation of the proposed merger, the merged entity's combined current and projected share
in the Atlantic region is de minimis, and the merger will not increase significantly market power
concentration in that region.
373. Only one party filed comments related to the effect of the proposed merger on the
U.S. international services market. TRICOM USA, Inc. (TRICOM), a U.S. carrier licensed to
provide local exchange service, long distance service, and international services, complains that
"the combined facilities of the merged company would give it the potential to serve as a
bottleneck to and from those overseas points where GTE and Bell Atlantic control the dominant
carrier." According to TRICOM, therefore, the merged company "would not only control
facilities on the domestic end in the largest metropolitan areas of the United States, but also on
the foreign and territorial end, particularly the Dominican Republic, Venezuela, and Puerto Rico
in this Hemisphere." TRICOM asks the Commission to require both GTE and Bell Atlantic to
"make affirmative showings that each of their overseas affiliates or subsidiaries do not presently
control and have no potential to control bottleneck facilities by virtue of the merger or
otherwise."
374. Both GTE and Bell Atlantic have provided the Commission with all the
information required under our rules, namely Sections 63.11 and 63.18(e), regarding investments
in or by foreign carriers. Our rules recognize that U.S. carriers may have investments in or by
foreign carriers, or may themselves be foreign carriers, and we have adopted a regulatory
framework to address concerns about anticompetitive behavior by U.S. carriers and their foreign
carrier affiliates. Indeed, in terms of control of bottleneck facilities on the foreign ends, TRICOM
is most concerned about the Dominican Republic and Venezuela. As discussed in detail below in
the foreign carrier affiliation section, currently we regulate GTE as a "dominant" international
carrier both on the U.S.-Dominican Republic route and on the U.S.-Venezuela route. Not only
will approval of the merger not disturb these classifications, but, as discussed below in approving
the international license transfers that are part of the merger, we amend Bell Atlantic's
authorizations to provide service on those routes to regulate them as dominant, where appropriate
under our rules.
375. TRICOM also requests that we require GTE and Bell Atlantic to demonstrate that
all overseas affiliates or subsidiaries are now treating, and will continue to treat, all nonaffiliated
U.S. carriers in a nondiscriminatory manner. Section 63.14 of the Commission's rules, to which
every U.S. international carrier is subject, specifically addresses TRICOM's concerns. That
section prohibits any U.S. international carrier from agreeing to accept from any foreign carrier
that possesses market power on a particular route special concessions of specified types. With
respect to TRICOM's concerns about the merged entity's control of bottleneck facilities on the
U.S. end of international routes, as discussed above, we already have concluded that, on balance,
any potential anticompetitive effects of the proposed merger in the domestic local exchange and
exchange access markets would be outweighed by the accompanying benefits of the conditions we
impose on the merger. Moreover, the Commission previously has addressed the proper
regulatory treatment of incumbent local exchange carrier provision of U.S. international
services.
A. Foreign Affiliation
376. In considering the effects of the proposed merger in U.S. international services
markets, we consider whether: (1) as a result of its acquisition by Bell Atlantic, GTE (and its
operating subsidiaries) would become affiliated with a foreign carrier that has market power on
the foreign end of a U.S. international route that GTE is authorized to serve; and (2) as a result of
its acquisition of GTE, Bell Atlantic (and its international carrier subsidiaries) would become
affiliated with a foreign carrier that has market power on the foreign end of a U.S. international
route that Bell Atlantic is authorized to serve.
377. Both Bell Atlantic and GTE have ownership interests in carriers that operate on
the foreign end of U.S. international routes that create "affiliations" within the meaning of section
63.09 of the Commission's rules. Subsidiaries of Bell Atlantic are authorized under section 214
of the Act to provide out-of-region U.S. international service terminating at all international
points. Subsidiaries of Bell Atlantic also are authorized to provide in-region international
service originating in New York and terminating at all international points except Gibraltar.
Subsidiaries of GTE are authorized under section 214 of the Act to provide U.S. international
service originating from points in the United States and terminating at various international
points. We note that, upon consummation of the proposed merger, except for services
originating in the State of New York, section 271 of the Act will prohibit any of Bell Atlantic's or
GTE's international carrier subsidiaries from providing international services originating in any
Bell Atlantic "in-region State," as that term is defined in section 271(i) of the Act. With the
exception of New York, Bell Atlantic has not yet obtained permission to provide long distance
services within any of the in-region States it currently serves. Therefore, upon consummation of
the merger, in order to comply with section 271, GTE and its subsidiaries must cease originating
international long distance traffic in Bell Atlantic's current in-region States other than New York.
By this Order, we modify GTE's international section 214 authorizations to exclude the provision
of international service originating in Bell Atlantic's in-region states other than New York.
1. Standards
378. We welcome foreign participation in the U.S. market for telecommunications
services. In the Foreign Participation Order, the Commission adopted an open entry policy for
carriers from World Trade Organization (WTO) members. As part of this policy, the Commission
adopted an open entry standard for applicants that request authority to serve a WTO member in
which the applicants have a foreign carrier affiliate. Previously, the Commission had applied an
"effective competitive opportunities" (ECO) test to certain applicants that sought to provide
service on routes where an affiliated foreign carrier possessed market power. In the Foreign
Participation Order, the Commission eliminated the ECO test in favor of a rebuttable
presumption that requests for international section 214 authority from applicants affiliated with
foreign carriers in WTO members do not pose concerns that would justify denial of the
application on competition grounds. The Commission retained the ECO test for certain
applicants that seek to serve non-WTO countries in which the applicant has an affiliation with a
foreign carrier possessing market power in such countries.
379. In the Foreign Participation Order, however, the Commission observed that the
exercise of foreign market power in the U.S. market could harm U.S. consumers through
increases in prices, decreases in quality, or a reduction in alternatives in end-user markets.
Generally, this risk occurs when a U.S. carrier is affiliated with a foreign carrier that has sufficient
market power on the foreign end of a route to affect competition adversely in the U.S. market.
380. Entry Standard. In a merger analysis, to determine whether the public interest is
served by permitting the merged entity to provide U.S. international service on each affiliated
route, we apply the entry standard adopted in the Foreign Participation Order. The Commission
also considers other public interest factors that may weigh in favor of, or against, granting an
international section 214 application, including national security, law enforcement, foreign policy
and trade concerns.
381. Regulatory Status. If we determine that the public interest would be served by
permitting the merged entity to provide U.S. international service on its affiliated routes, we next
decide the terms under which the merged entity will provide service on these routes. Specifically,
we examine whether it is necessary to impose the Commission's international dominant carrier
safeguards on the merged entity's international operating subsidiaries in their provision of service
on the affiliated routes. The standard for determining the regulatory status of the merged entity
on affiliated routes also is governed by the Foreign Participation Order. Under rules adopted in
that order, the Commission regulates U.S. international carriers as dominant on routes where an
affiliated foreign carrier has sufficient market power on the foreign end to affect competition
adversely in the U.S. market. A U.S. carrier presumptively is classified as nondominant on an
affiliated route if the carrier demonstrates that the foreign affiliate lacks 50 percent market share
in the international transport and local access markets on the foreign end of the route.
1. Specific Affiliations
382. We consider first Bell Atlantic's foreign carrier affiliations and the issues raised by
those affiliations in this transfer proceeding. We then consider GTE's foreign carrier affiliations
and issues raised by those affiliations. On April 11, 2000, Bell Atlantic's and GTE's international
carrier subsidiaries notified the Commission, pursuant to sections 63.11(a)(1) and (a)(2) of the
Commission's rules, that they will become affiliated with foreign carriers upon consummation of
the pending merger between Bell Atlantic and GTE. The Foreign Carrier Notification included
a description of the foreign affiliations of both Bell Atlantic's and GTE's international carrier
subsidiaries.
a. Bell Atlantic Foreign Carrier Affiliations
383. As a result of the merger, GTE's international carrier subsidiaries will become
affiliated with all of Bell Atlantic's foreign carrier affiliates. Bell Atlantic's foreign carrier
affiliates operate in Mexico (Iusacell) and Gibraltar (Gibraltar NYNEX Communications, Ltd).
GTE's international carrier subsidiaries currently are authorized to provide resold and facilities-
based international telecommunications services to Gibraltar and Mexico (among other
countries). Applicants request that we authorize a transfer of control of GTE's international
section 214 authorizations to Bell Atlantic. Thus, approval of the merger Application would
permit Bell Atlantic-controlled GTE subsidiaries to serve these affiliated routes.
384. This Application raises for our consideration the issue of whether the public
interest would be served by permitting Bell Atlantic to provide U.S. international service between
the United States and Gibraltar and Mexico through its acquisition of control of GTE's
international section 214 authorizations. If we approve the proposed transfer of control of GTE's
authorizations to Bell Atlantic, we also must inquire whether Bell Atlantic's affiliates in Gibraltar
or Mexico have sufficient market power to warrant classifying the combined entity's U.S.
international carrier subsidiaries as "dominant" U.S. international carriers on either of these
routes. For the reasons discussed below, we conclude that the public interest would be served by
transferring control of GTE's international section 214 authorizations to Bell Atlantic, subject to
classification of the merged entity's subsidiaries as dominant international carriers in their
provision of service on the U.S.-Gibraltar route.
(i) Entry Standard
385. Mexico. Mexico is a member of the WTO. Accordingly, we find that Bell Atlantic
is entitled to a presumption that its affiliation with Iusacell does not raise competition concerns
that would warrant denial of its request to serve the U.S.-Mexico route through its acquisition of
control of GTE's international section 214 certificates.
386. Gibraltar. Regarding Gibraltar's status with respect to the WTO, we note that an
opinion provided to us by the U.S. Department of State concludes that the 1994 Marrakesh
Agreement Establishing the World Trade Organization applies to Gibraltar. We also note that
the United Kingdom maintains a different view, specifically, that the territorial application of the
WTO Convention does not extend to the United Kingdom's overseas territories. We defer to
the opinion provided to us by the U.S. Department of State and therefore treat Gibraltar as a
WTO Member for purposes of applying the proper entry standard to this transfer of control
application. Accordingly, we find that Bell Atlantic is entitled to a presumption that its foreign
carrier affiliation with Gibraltar-NYNEX does not raise competition concerns that would warrant
denial of its request to serve the U.S.-Gibraltar route through its acquisition of control of GTE's
international section 214 certificates.
(i) Regulatory Status
387. We next examine whether it is necessary to impose our international dominant
carrier safeguards on the merged entity's international carrier subsidiaries in their provision of
service on these affiliated routes.
388. Mexico. Applicants request continued classification as nondominant on the U.S.-
Mexico route, asserting that the Commission previously has determined under section 63.10(a)(3)
of its rules that Bell Atlantic's foreign affiliate in Mexico, Iusacell, lacks sufficient market power
in Mexico to affect competition adversely in the U.S. market. Applicants certify further that
GTE has does not have any ownership interest in a foreign carrier in Mexico, and the GTE
international carriers will not be affiliated with any foreign carrier in Mexico other than Iusacell.
Thus, they argue, the merger will not result in any increase in Iusacell's market power in Mexico
or give Iusacell any greater ability to affect competition in the U.S. market than Iusacell currently
has. As Applicants point out, we previously have found that Iusacell does not control
bottleneck services or facilities in Mexico, and therefore lacks the ability to discriminate against
unaffiliated U.S. international carriers terminating traffic in Mexico. We therefore found Bell
Atlantic Communications, Inc. (BACI), one of Bell Atlantic's international carrier subsidiaries, to
be nondominant on the U.S.-Mexico route. We find no basis to conclude that the merger will
result in an increase in Iusacell's market power. We therefore conclude that, after the merger
with GTE, Bell Atlantic subsidiaries are entitled to continued classification as nondominant on the
U.S.-Mexico route.
389. Gibraltar. BACI is classified as a dominant international carrier on the U.S.-
Gibraltar route due to its affiliation with Gibraltar NYNEX Communications Ltd. (GNCL), the
only carrier authorized to provide domestic wireline telecommunications services in Gibraltar.
Applicants assert that dominant carrier regulation does not apply to BACI at this time, however,
because BACI serves Gibraltar solely through resale of unaffiliated U.S. carrier international
switched services. Section 63.10 of the Commission's rules specifically establishes a
presumption of nondominance for carriers, in their provision of switched services on affiliated
routes where they provide such services solely through the resale of an unaffiliated U.S. facilities-
based carrier's international switched services. Although BACI is dominant on the U.S.-
Gibraltar route, it has not needed to, and need not in the future, comply with the Commission's
dominant carrier safeguards in its provision of switched services solely through the resale of an
unaffiliated U.S. facilities-based carrier's international switched services.
390. GTE subsidiaries, like Bell Atlantic subsidiaries, are authorized to provide multiple
types of service (including, but not limited to, facilities-based, resale of private line, and resale of
switched services of unaffiliated facilities-based U.S.-authorized carriers). Upon consummation
of the merger with Bell Atlantic, GTE's international carrier subsidiaries will be treated the same
as Bell Atlantic's international carrier subsidiaries currently are treated with respect to service to
Gibraltar. Therefore, upon consummation of the merger, GTE's international carrier subsidiaries
will be classified as dominant on the U.S.-Gibraltar route. As with BACI, however, when they
are only reselling the switched services of unaffiliated facilities-based U.S.-authorized carriers,
they will not be subject to the Commission's international dominant carrier safeguards on the
U.S.-Gibraltar route. Because several of GTE's international authorizations that include service
to Gibraltar are not limited to the resale of switched services, we must amend, effective upon
consummation of the proposed merger with Bell Atlantic, those authorizations of the GTE
international carrier subsidiaries that include service to Gibraltar and are not limited to the resale
of switched services to classify them as dominant on the U.S.-Gibraltar route. These
modifications of authorizations will require that these subsidiaries of the merged entity comply
with appropriate dominant carrier safeguards if the GTE international carrier subsidiaries elect to
provide services on the U.S.-Gibraltar route other than by the resale of the switched services of an
unaffiliated facilities-based U.S.-authorized carrier.
a. GTE Foreign Carrier Affiliations
391. GTE has investment interests in several foreign carriers that rise to the level of an
affiliation under section 63.09 of the Commission's rules. GTE identifies the following foreign
carriers (or holding companies of such carriers) with which it has such investment interests: (1)
BCT. TELUS Communications, Inc. (Canada/British Columbia and Alberta); (2) Quebec-
Telephone (Canada/Quebec); (3) Compa¤ia Dominicana de Tel‚fonos, C. por A. (CODETEL)
(Dominican Republic); (4) Compa¤ia An˘nima Nacional Tel‚fonos de Venezuela (CANTV)
(Venezuela); (5) CTI Compa¤ia de Tel‚fonos del Interior S.A. and CTI Norte Compa¤ia de
Tel‚fonos del Interior S.A. (collectively "CTI") (Argentina); and (6) GTE Far East (Services)
Limited ("GTEFE") (Japan). As a result of the proposed merger, Bell Atlantic would acquire
indirectly GTE's ownership interests in the above-named foreign carriers. Applicants state that
two of Bell Atlantic's subsidiaries, BACI and NYNEX-LD, currently are authorized to provide
resold and facilities-based international telecommunications services originating in New York and
outside of the Bell Atlantic in-region states to each of these countries (among others).
(i) Entry Standard
392. Applying the entry standard in the Foreign Participation Order, we conclude that
the public interest would continue to be served by Bell Atlantic's provision of service, through all
of its authorized subsidiaries, on U.S. international routes to all of the countries in which GTE has
investment interests in foreign carriers that rise to the level of an affiliation (as noted above,
Argentina, Canada, Japan, the Dominican Republic, and Venezuela). Each of these countries is a
member of the WTO, and we find no other public interest factors that would warrant a different
conclusion.
393. Argentina. Applicants request continued classification as nondominant on the
U.S.-Argentina route. They argue that all of their international carrier subsidiaries are entitled
to a presumption of nondominance under Rule 63.10(a)(3) because GTE's foreign carrier affiliate,
CTI, is a cellular carrier and a new entrant in the international services market and, indeed, has
not yet begun to provide international long distance service. Applicants, assert, therefore, that
CTI lacks international transport and local access market power in Argentina. We find that
Applicants have submitted sufficient information to demonstrate that, upon consummation of the
proposed merger, each of Bell Atlantic's international carrier subsidiaries will warrant continued
regulation as nondominant carriers on the U.S.-Argentina route. As we have previously found in
our 1998 Biennial Regulatory Review of international common carrier regulations, foreign
carriers that have only mobile wireless (and no wireline) facilities are unlikely to raise market
power concerns. Moreover, there is no evidence in the record that suggests that CTI, as a new
entrant in Argentina's international long distance market, possesses market power.
394. Canada. Applicants request continued classification as nondominant on the U.S.-
Canada route. Applicants note that the Commission previously has found GTE subsidiaries
nondominant on this route. They note that Bell Atlantic's international carrier subsidiaries
currently are authorized to operate on the U.S.-Canada route as nondominant carriers for the
provision of resold and facilities-based services originating in New York and outside of the other
in-region states served by Bell Atlantic's local operating telephone companies. Applicants also
assert that, other than the interests in BCT.TELUS Communications, Inc., and Quebec-Telephone
that Bell Atlantic will acquire in the merger, Bell Atlantic has no ownership interest in a foreign
carrier in Canada, and Bell Atlantic's international carrier subsidiaries have no affiliation with any
foreign carrier in Canada. According to Applicants, therefore, the merger will not result in any
increase in the foreign affiliates' market power in Canada or give them any greater ability to affect
competition in the U.S. market than they currently have. The International Bureau, in a 1996
order, classified a GTE subsidiary, GTE Hawaii, as nondominant on the U.S.-Canada route.
We find no basis in the record in this proceeding not to extend this nondominant treatment to the
merged entity's international carrier subsidiaries. We conclude, therefore, that, upon
consummation of the proposed merger, the merged entity's international carrier subsidiaries will
be classified as nondominant on the U.S.-Canada route. As with any finding of nondominance on
a particular route, this finding is without prejudice to future Commission action.
395. Japan. Applicants request continued classification as nondominant on the U.S.-
Japan route. According to Applicants, all of the international carrier subsidiaries are entitled to
a presumption of nondominance under section 63.10(a)(3) of the Commission's rules because
GTE's foreign affiliate in Japan, GTEFE, is a start-up company that currently operates as a
reseller and lacks market power in Japan. As we have previously found in our 1998 Biennial
Regulatory Review of international common carrier regulations, foreign carriers that have only
resale facilities are unlikely to raise market power concerns. On this basis, we find that
Applicants have provided sufficient information to demonstrate that GTEFE lacks market power
in Japan and that the merged entity's international carrier subsidiaries warrant nondominant
treatment on the U.S.-Japan route.
396. Dominican Republic and Venezuela. Applicants acknowledge that CODETEL, a
foreign carrier affiliate of GTE's in the Dominican Republic, and CANTV, a foreign carrier
affiliate of GTE's in Venezuela, have been found to have market power in their respective
countries. Applicants assert, however, that Bell Atlantic's international carrier subsidiaries are
entitled to a continued presumption of nondominance on the U.S.-Dominican Republic and U.S.-
Venezuela routes under section 63.10(a)(4) of the Commission's rules because they provide
switched service solely through the resale of the international switched services of unaffiliated
U.S. carriers. Applicants assert that the GTE carriers have accepted dominant regulation on the
U.S.-Dominican Republic route for facilities-based service, because GTE's foreign affiliate,
CODETEL, has been found to have market power in the Dominican Republic. Applicants
assert that the GTE carriers have accepted dominant regulation on the U.S.-Venezuela route for
facilities-based service because GTE's foreign affiliate, CANTV, has been found to have market
power in Venezuela.
397. In the GTE Venezuela/Dominican Republic Order, the International Bureau's
Telecommunications Division determined that a GTE subsidiary, GTE Telecom, would be subject
to the Commission's international dominant carrier regulations for the provision of facilities-based
services and resold, non-interconnected private line services to the Dominican Republic and
Venezuela. In so determining, the Telecommunications Division noted that GTE Telecom had
limited its request for nondominant status to its resale of switched services. The
Telecommunications Division noted, however, that the presumption of nondominance for
switched resale in section 63.10(a)(4) of the Commission's rules does not apply where a resale
carrier also provides switched services on the affiliated route as a facilities-based carrier. The
Telecommunications Division stated, therefore, that GTE Telecom would be subject to dominant
carrier regulation in its provision of switched service to the Dominican Republic and Venezuela
upon initiation of facilities-based services to each country.
398. Bell Atlantic subsidiaries are authorized to provide multiple types of service
(including, but not limited to, facilities-based, resale of private line, and resale of switched services
of unaffiliated facilities-based U.S.-authorized carriers). Upon consummation of the merger with
GTE, Bell Atlantic's international carrier subsidiaries will be treated the same as GTE's
international carrier subsidiaries currently are treated with respect to service to the Dominican
Republic and Venezuela. Therefore, upon consummation of the merger, Bell Atlantic's
international carrier subsidiaries will be classified as dominant on the U.S.-Dominican Republic
and U.S.-Venezuela routes. However, when they are only reselling the switched services of
unaffiliated facilities-based U.S.-authorized carriers, Bell Atlantic subsidiaries, like GTE
subsidiaries, will not be subject to the Commission's international dominant carrier safeguards on
the these routes. Because several of Bell Atlantic's authorizations that include service to the
Dominican Republic and Venezuela are not limited to the resale of switched services, we must, as
we are doing with respect to several of GTE's authorizations to serve Gibraltar, amend, effective
upon consummation of the proposed merger, several of the authorizations of the Bell Atlantic
international carrier subsidiaries or affiliates that include service to the Dominican Republic and
Venezuela to make them dominant on those routes. These modifications of authorizations will
require that subsidiaries or affiliates of the merged entity comply with appropriate dominant
carrier safeguards if these carriers elect to provide services on the U.S.-Dominican Republic and
U.S.-Venezuela routes other than by the resale of the switched services of an unaffiliated
facilities-based U.S.-authorized carrier.
1. Cable Landing Licenses
399. As part of the merger application, Applicants request authority to transfer control
of several submarine cable landing licenses held by GTE's international carrier subsidiaries.
400. Prior to the Foreign Participation Order, the Commission had evaluated cable
landing license applications filed by foreign carriers or their affiliates under the analysis set forth in
its ECO test. In the Foreign Participation Order, the Commission concluded that it would no
longer require applicants with market power in WTO members (or applicants affiliated with such
carriers) to demonstrate that the foreign markets offer effective competitive opportunities to
obtain section 214 authority to serve those countries, or a cable landing license to land or operate
a cable in those countries. The Commission determined that it would analyze foreign affiliation
in the context of an application for a cable landing license in the same manner it evaluated section
214 authorizations. To that end, the Commission concluded that, where the applicant is a
foreign carrier, or affiliated with a foreign carrier, that has market power in a WTO member
where the cable lands, the application is evaluated under a strong presumption that it should be
granted.
401. In the Foreign Participation Order, the Commission found that, because of the
implementation of the WTO Basic Telecom Agreement, foreign carriers from WTO members
would rarely be able to harm competition in the U.S. market by acting anticompetitively. The
Commission further noted that, "[e]ven if a particular application presents unusual risks to
competition, most potential problems can be addressed by imposing conditions on the license,"
and discussed examples of the kinds of conditions the Commission has imposed on cable landing
licenses. For example, the International Bureau has imposed recordkeeping requirements on a
licensee where it was deemed necessary to address anticompetitive concerns specific to one
proposed submarine cable system. The Commission also stated that, when considering an
application to land and operate a submarine cable that will connect to a non-WTO member, it
would consider whether the applicant is, or is affiliated with, a carrier that has market power in a
market where the cable lands, and if so, would consider whether that destination market offers
effective competitive opportunities for U.S. companies to land or operate a submarine cable in
that country. The Commission stated that it would also continue to consider, in addition to the
de jure and de facto ECO criteria, other factors consistent with the Commission's discretion under
the Cable Landing License Act that may weigh in favor of or against grant of a license.
402. In seeking authority to transfer control of a cable landing license, a carrier must
comply with criteria similar to what is required of a carrier seeking section 214 authorization.
Specifically, pursuant to sections 1.767 and 63.18 of the Commission's rules, the carrier must
certify whether it is affiliated with a foreign carrier and provide information as to whether the
foreign carrier has market power in a country where the cable lands. We find that the proposed
merger will not result in Bell Atlantic's acquiring an affiliation with a foreign carrier (i.e., a GTE
foreign carrier) that has market power on the foreign end of a submarine cable for which Bell
Atlantic holds a license. We also observe that the proposed merger will not result in GTE's
acquiring an affiliation with a foreign carrier (i.e., a Bell Atlantic foreign carrier) that has market
power on the foreign end of a submarine cable for which GTE holds a license. Accordingly, we
conclude that the transfer of control of the submarine cable landing licenses from GTE to Bell
Atlantic is consistent with our rules and with the Cable Landing License Act.
CDIII. OTHER ISSUES
A. Service Quality Issues
404. A number of commenters raise concerns regarding potential service quality
problems resulting from the merger. These parties generally argue that service quality data and
anecdotal evidence regarding Bell Atlantic's and GTE's performance demonstrate that mergers
among large incumbent LECs adversely affect the public interest by hampering the delivery of
service to consumers. The Applicants respond by asserting that these allegations are beyond the
scope of this proceeding and submitting facts in an attempt to rebut commenters' claims.
405. We reject claims that we should prohibit these license transfers because of
speculation that service quality in the merged company's service areas will deteriorate as a result
of the merger. We conclude that the commitments proffered by Bell Atlantic and GTE in
supplementing their application sufficiently mitigate the service quality concerns raised in the
record. These voluntary commitments include several measures designed to prevent potential
service quality degradation after the merger. Moreover, we anticipate that the quarterly
reporting requirements contained in the merger conditions will provide the Commission, state
public service commissions, and the public with key service quality data in a timely manner. We
expect that these conditions will assist the states in promoting a high quality telecommunications
service by and assist this Commission in detecting any potential post-merger degradation in
service quality.
A. Character Issues
406. Among the factors that the Commission considers in its public interest inquiry is
whether the applicant for a license has the requisite "citizenship, character, financial, technical,
and other qualifications." The Commission has previously determined that, in deciding
character issues, it will consider certain forms of adjudicated, non-FCC related misconduct that
includes: (1) felony convictions; (2) fraudulent misrepresentations to governmental units; and (3)
violations of antitrust or other laws protecting competition. With respect to FCC-related
conduct, the Commission has stated that it would treat any violation of any provision of the Act,
or of the Commission's rules or polices, as predictive of an applicant's future truthfulness and
reliability and, thus, as having a bearing on an applicant's character qualifications. In prior
incumbent LEC merger orders, the Commission has used the Commission's character policy in the
broadcast area as guidance in resolving similar questions in license transfer proceedings.
407. A number of commenters maintain that Bell Atlantic has a history of resisting
competition in its existing monopoly markets. Commenters argue, for instance, that Bell Atlantic
does not offer services throughout its region that would block directory assistance calls and toll
calls on resold lines, does not compensate competitive carriers for the termination of traffic
bound for Internet service providers, fails to provide nondiscriminatory access to OSS, and
fails to provide xDSL services to customers that choose to subscribe to another carrier's local
voice service. Additionally, AT&T argues that Bell Atlantic has failed to comply with the
conditions imposed by the Commission on the Bell Atlantic/NYNEX merger.
408. Similarly, the record in this proceeding contains allegations by commenters that
GTE has been extremely slow to implement the local competition provisions of the 1996 Act and
has delayed competitive entry into its service areas. For example, many competitive LECs
maintain that GTE does not provide collocation as provided in the Act and the Commission's
rules. In addition, commenters' make claims relating to the availability of unbundled network
elements, OSS issues, delivery of unbundled loops, implementation of line sharing,
resale, interconnection, reciprocal compensation, number portability, advanced services,
universal service, and billing. Additionally, SCC Communications claims that both Bell
Atlantic and GTE currently violate their statutory obligations under Section 222(g), which
requires incumbent LECs to provide subscriber list information to providers of emergency
services and emergency support services.
409. We conclude that none of the foregoing allegations provides a basis for finding
that Applicants lack the fitness to acquire licenses and authorizations currently held by GTE. The
Applicants respond to each of these allegations by citing facts rebutting commenters' claims or by
arguing that many of the allegations concern matters that are currently being addressed by this
Commission or a state regulatory agency in other proceedings. Allegations concerning, for
instance, certain obligations with respect to advanced services, collocation, and the Bell
Atlantic/NYNEX conditions relate to matters addressed in separate Commission proceedings.
In this regard, the Commission has previously stated that typically it will not consider in merger
proceedings "matters that are the subject of other proceedings before the Commission because the
public interest would be better served by addressing the matter in the broader proceeding of
general applicability." Alternatively, some of these allegations are best addressed in
enforcement proceedings brought by aggrieved parties under section 208 of the Act.
Accordingly, we do not consider such issues in determining whether the proposed transfers are in
the public interest.
410. Thus, we decline to consider these allegations as part of our analysis of Bell
Atlantic's fitness to acquire licenses and authorizations currently held by GTE. In reaching this
conclusion, we emphasize that we are in no way condoning actions by an incumbent LEC that
have the potential to impede the 1996 Act's goal of facilitating competition in all
telecommunications markets. Indeed, as noted above, without the Applicants' voluntary
commitments aimed at opening its local markets to competition, the public interest benefits of the
proposed merger would not outweigh the significant public interest harms. We believe that the
Applicants' commitments on issues such as collocation, OSS enhancements, shared transport, and
offering of UNEs, and performance measurements should facilitate the development of
competition in the combined Bell Atlantic/GTE region.
A. Requests for Evidentiary Hearing
411. We deny commenters' requests that the Commission designate the proposed
merger, or specific issues raised by the merger, for a trial-type evidentiary hearing before an
administrative law judge to determine whether approval of the transfer of control request resulting
from the proposed merger would serve the public interest. Under the Communications Act, the
Commission is required to hold an evidentiary hearing on transfer of control applications in
certain circumstances. Parties challenging an application to transfer control by means of a
petition to deny under section 309(d) must satisfy a two-step test. First, the petition to deny
must set forth 'specific allegations of fact sufficient to show that . . . a grant of the application
would be prima facie inconsistent with [the public interest];'. Second, the petition must present
a 'substantial and material question of fact.' If the Commission concludes that the protesting
party has met both prongs of the test, or if it cannot, for any reason, find that grant of the
application would be consistent with the public interest, the Commission must formally designate
the application for a hearing in accordance with section 309(e).
412. To satisfy the first prong of the test, a petitioning party must set forth allegations,
supported by affidavit, that constitute "specific evidentiary facts, not ultimate conclusionary facts
or mere general allegations . . .." The Commission determines whether a petitioner has met this
threshold inquiry in a manner similar to a trial judge's consideration of a motion for directed
verdict: "if all the supporting facts alleged in the affidavits were true, could a reasonable fact
finder conclude that the ultimate fact in dispute had been established." If the Commission
determines that a petitioner has satisfied the threshold standard of alleging a prima facie
inconsistency with the public interest, it must then proceed to the second phase of the inquiry and
determine whether, "on the basis of the application, the pleadings filed, or other matters which
[the Commission] may officially notice," the petitioner has presented a "substantial and material
question of fact." If the Commission concludes that the "totality of the evidence arouses a
sufficient doubt" as to whether grant of the application would serve the public interest, the
Commission must designate the application for hearing pursuant to section 309(e).
413. In evaluating whether a petitioner has satisfied the two-part test established in
section 309(d), the D.C. Circuit has indicated that where petitioners assert only "legal and
economic conclusions concerning market structure, competitive effect, and the public interest,"
such assertions "manifestly do not" require a live hearing. Moreover, in deferring to the
Commission's determination not to hold an evidentiary hearing in United States v. FCC, the Court
stated that "to allow others to force the Commission to conduct further evidentiary inquiry would
be to arm interested parties with a potent instrument for delay." In that case, the D.C. Circuit
deferred to the Commission's conclusion that the potential benefits of such a hearing would be
outweighed by the delay and its attendant costs.
414. As an initial matter, we note that some parties seeking an evidentiary hearing in
this merger proceeding did not satisfy the procedural requirements of section 309(d)(1). First,
several commenters included their requests for evidentiary hearings in general comments
regarding the Application, not in a petition to deny, as section 309(d)(1) requires.
Additionally, in many instances commenters failed to support any of their allegations with
affidavits. Finally, and most importantly, the issues raised by commenters do not reflect disputes
over material facts, but rather focus on issues concerning the competitive impact of the merger
and the public interest. These types of issues "manifestly do not" require a live hearing.
415. We conclude that none of the requests for evidentiary hearing has raised a
substantial and material question of fact that would require an evidentiary hearing. The parties
dispute the overall competitive impact of the merger and the ultimate public interest determination
which, according to the D.C. Circuit, are claims that "manifestly do not" require a hearing.
Accordingly, we find that no party has satisfied the two-step test set forth in section 309(d),
either procedurally or substantively. We disagree with RCN, for instance, that there is a material
issue of fact as to whether Bell Atlantic is implementing policies and positions that do not comply
with section 251 of the Act. As discussed above, we conclude that such allegations should be
properly raised before in an enforcement proceeding and are not a basis for denying the
Applicants' proposed transfers. In addition, the voluminous record before us in this proceeding,
including the numerous comments and ex parte filings we have received and the public forums we
have conducted, has provided sufficient evidence to conclude no substantial and material question
of fact has been raised and that grant of the Applicants' applications, as supplemented with the
conditions imposed in this Order, serves the public interest, convenience and necessity.
CDXVI. ORDERING CLAUSES
417. Accordingly, having reviewed the applications and the record in this matter, IT IS
ORDERED, pursuant to Sections 4(i) and (j), 214(a), 214(c), 309, and 310(d) of the
Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j), 214(a), 214(c), 309,
310(d), and the Cable Landing License Act, 47 U.S.C. 34-39, that the applications filed by
GTE Corporation and Bell Atlantic Corporation in the above-captioned proceeding ARE
GRANTED subject to the conditions stated below.
418. IT IS FURTHER ORDERED pursuant to Sections 4(i) and (j), 214(a), 214(c),
309, and 310(d) of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j),
214(a), 214(c), 309, 310(d), and the Cable Landing License Act, 47 U.S.C. 34-39, that the
above grant shall include authority for Bell Atlantic to acquire control of:
a) any authorization issued to GTE's subsidiaries and affiliates during the Commission's
consideration of the transfer of control applications and the period required for
consummation of the transaction following approval;
b) construction permits held by licensees involved in this transfer that mature into licenses
after closing and that may have been omitted from the transfer of control applications;
and
c) applications that will have been filed by such licensees and that are pending at the time
of consummation of the proposed transfer of control.
4. IT IS FURTHER ORDERED that Bell Atlantic/GTE must complete the Genuity
initial public offering (IPO) as described herein prior to the transfer of licenses and lines. Bell
Atlantic/GTE shall make certification to the Commission that such IPO was completed prior to
merger closing.
5. IT IS FURTHER ORDERED that the Applicants must cease providing the interLATA
services described in the Letter from Alan F. Ciamporcero, Vice President, Regulatory Affairs,
GTE Service Corporation, to Magalie R. Salas, Secretary, Federal Communications Commission,
CC Docket No. 98-184 (filed Apr. 17, 2000), attached hereto as Appendix E, and the private-line
resale services of GTE Telecom, described in the Letter from Alan F. Ciamporcero, Vice
President, Regulatory Affairs, GTE Service Corporation, to Magalie R. Salas, Secretary, Federal
Communications Commission, CC Docket No. 98-184 (filed Apr. 28, 2000), attached hereto as
Appendix F, within Bell Atlantic's in-region states other than New York and shall certify to the
Commission that such cessation of service was completed prior to merger closing.
6. IT IS FURTHER ORDERED that as a condition of this grant Bell Atlantic and GTE
shall comply with the conditions set forth in Appendices B and D of this Order.
7. IT IS FURTHER ORDERED that, pursuant to sections 4(i) and (j), 309, and 310(d)
of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j), 309, 310(d), the
Petition to Condition Grant filed by the Commonwealth of Northern Mariana Islands on
November 23, 1998, IS DENIED.
8. IT IS FURTHER ORDERED that, pursuant to sections 4(i) and (j), 309, and 310(d)
of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j), 309, 310(d), the
Comments of United States Cellular Corporation and Notice of Intention to Participate filed on
November 23, 1998, with respect to a waiver of CMRS Spectrum Cap Rule, IS DENIED.
9. IT IS FURTHER ORDERED that, pursuant to sections 4(i) and (j), 309, and 310(d)
of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j), 309, 310(d), the
applications of Bell Atlantic and GTE to transfer control of wireless licenses referenced herein and
related thereto ARE GRANTED, subject to the condition that the parties comply with 47 C.F.R.
22.942.
10. IT IS FURTHER ORDERED that, pursuant to sections 4(i) and (j), 309, and 310(d)
of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j), 309, 310(d), the
applications of Bell Atlantic and GTE to transfer control of wireless licenses referenced herein and
related thereto ARE GRANTED, subject to the condition that the parties come into compliance
with 47 C.F.R. 20.6 either within 60 days after merger closing, or within 180 days following
release of this Order, whichever date is earlier.
11. IT IS FURTHER ORDERED that, as part of our approval of the merger, we approve
the transfer of control to Bell Atlantic of all international section 214 authorizations (including
pending applications) and all cable landing licenses (including pending applications), except those
that will be transferred to Genuity as specified below, and subject to the modifications described
below, which currently are held by the following international carrier subsidiaries of GTE: GTE
Communications Corporation, GTE Hawaiian Tel International Incorporated, GTE Pacifica
Incorporated, GTE Wireless Incorporated, GTE Airfone Incorporated, GTE Railfone
Incorporated, Codetel International Communications Incorporated, GTE Telecommunication
Services Incorporated, TELUS Communications (B.C.) Inc., and Celulares Telef˘nica.
12. IT IS FURTHER ORDERED that all the international section 214 authorizations of
the GTE international carrier subsidiaries that will be transferred to Bell Atlantic as part of GTE's
merger with Bell Atlantic are hereby modified, merger closing, to exclude the provision of
international service originating in Bell Atlantic's in-region states other than New York.
13. IT IS FURTHER ORDERED that the following international section 214
authorizations granted to subsidiaries of GTE are amended to apply dominant carrier regulation,
as specified in section 63.10 of the rules, to their provision of the authorized services on the U.S.-
Gibraltar route effective upon consummation of GTE's merger with Bell Atlantic: GTE
Communications Corporation, File No. ITC-214-19991104-00684; Codetel International
Communications Incorporated, File No. ITC-214-19990303-00103; Celulares Telef˘nica, Inc.,
File No. ITC-T/C-19980902-00605; GTE Hawaiian Tel International Incorporated, File Nos.
ITC-96-645 and ITC-97-078; GTE Pacifica Incorporated, File No. ITC-97-779-AL; and TELUS
Communications (B.C.), Inc., File No. ITC-T/C-19990114-00023.
14. IT IS FURTHER ORDERED that the following international section 214
authorizations granted to subsidiaries and affiliates of Bell Atlantic are amended to apply
dominant carrier regulation, as specified in section 63.10 of the rules, to their provision of the
authorized services on the U.S.-Dominican Republic and U.S.-Venezuela routes effective upon
consummation of GTE's merger with Bell Atlantic: Cellco Partnership, File Nos. ITC-96-246 and
ITC-96-579; NYNEX Long Distance Company, File Nos. ITC-96-520, ITC-214-19971223-
99813 (old File No. ITC-98-002), and ITC-214-19971223-99811 (old File No. ITC-98-003); and
Bell Atlantic Communications, Inc., File Nos. ITC-96-451, ITC-214-19971223-99813 (old File
No. ITC-98-002), and ITC-214-19971223-99811 (old File No. ITC-98-003).
15. IT IS FURTHER ORDERED that, as part of our approval of the merger, we approve
the transfer of control to Genuity of the following international section 214 authorizations and
cable landing licenses held by various GTE international operating subsidiaries, subject to the
modifications described below: (1) File No. ITC-214-19990708-00391 (global facilities-based and
resale authorization held by GTE Telecom Incorporated); (2) File No. SCL-98-003/SCL-98-003A
(submarine cable landing license for AMERICAS-II Cable to be held by GTE Telecom
Incorporated after a pro forma assignment from GTE Communications Corp.); (3) File No. SCL-
LIC-19990303-00004 (submarine cable landing license for TAT-14 Cable from GTE Intelligent
Network Services); (4) File No. SCL-LIC-19981117-00025 (submarine cable landing license for
Japan-U.S. Cable from GTE Intelligent Network Services); and (5) ITC-98-342/ ITC-98-342A
(international section 214 authorization, associated with the AMERICAS-II Cable landing license,
to be held by GTE Telecom Incorporated after a pro forma assignment from GTE
Communications Corp.).
16. IT IS FURTHER ORDERED that the international section 214 authorizations for
which we here approve a transfer of control to Genuity, File Nos. ITC-214-19990708-00391 and
ITC-98-342/ ITC-98-342A, are modified, effective upon completion of the transfer to Genuity, to
classify GTE Telecom Incorporated as a nondominant international carrier on the U.S.-Dominican
Republic and U.S.-Venezuela routes.
17. IT IS FURTHER ORDERED that pursuant to section 212 of the Communications
Act, all of Bell Atlantic's and GTE's post-merger carrier subsidiaries will be "commonly owned
carriers" as that term is defined in the Commission's rules.
18. IT IS FURTHER ORDERED that all motions to accept late-filed comments filed in
CC Docket No. 98-184 ARE GRANTED.
19. IT IS FURTHER ORDERED that all petitions to deny the applications of Bell
Atlantic and GTE for transfer of control and all requests to hold an evidentiary hearing ARE
DENIED for the reasons stated herein.
20. IT IS FURTHER ORDERED that pursuant to section 1.103 of the Commission's
rules, 47 C.F.R. 1.103, this Memorandum Opinion and Order is effective upon adoption.
FEDERAL COMMUNICATIONS COMMISSION
Magalie Roman Salas
Secretary
Appendix A
List of Commenters
APPENDIX A: LIST OF COMMENTERS, CC DOCKET NO. 98-184
BELL ATLANTIC/GTE OCTOBER 2, 1998 APPLICATION FOR
TRANSFER OF CONTROL
Petitions/Comments (filed November 23, 1998):
1. AT&T
2. Alliance for Public Technology (APT)
3. Bear Stearns & Co., Inc.
4. CTC Communications Corp. (CTC)
5. Cablevision LightPath, Inc. (Cablevision)
6. Communications Workers of America (CWA)
7. Competitive Enterprise Institute (CPI)
8. Consumers Union and the Consumer Federation of America
9. CoreComm Ltd. (CoreComm)
10. EMC Corp.(EMC)
11. Focal Communications Corporation (FOCAL)
12. Freedom ring Communications, LLC d/b/a BayRing Communications (BayRing)
13. GST Telecom Inc. (GST)
14. Hyperion Telecommunications, Inc. (Hyperion)
15. Indiana Utility Regulatory Commission (IURC)
16. Keep America Connected
17. KMC Telecom (KMC)
18. Level 3
19. MCI WorldCom, Inc. (MCI WorldCom)
20. National Consumers League
21. Pactec Communications (Pactec)
22. Pilgrim Telephone (Pilgrim)
23. Public Utility Commission of Texas (PUC of Texas)
24. RCN Telecom Services, Inc. (RCN)
25. Rainbow/Push Coalition
26. Sprint
27. Supra Telecommunications & Information Systems (Supra)
28. Telecommunications Resellers Association (TRA)
29. The Commonwealth of Northern Mariana Islands
30. The Consumer Groups
31. Tricom USA (Tricom)
32. Triton, PCS, Inc. (Triton)
33. United States Cellular Corporation
34. WorldPath Internet Services (WorldPath)
35. XChange, L.L.C. (XChange)
Oppositions/Reply Comments (filed December 23, 1998):
1. Bell Atlantic Corporation and GTE Corporation (Bell Atlantic/GTE)
2. Campaign for Telecommunications Access
3. Commonwealth of the Northern Mariana Islands
4. Competition Policy Institute (CPI)
5. Consumer Groups
6. CTC Communications, Corp (CTC)
7. Hyperion Telecommunications, Inc. (Hyperion)
8. Keep America Connected, et, al.
9. MCI WolrdCom, Inc. (MCI WorldCom)
10. National Hispanic Council on Aging, et, al.
11. Progress & Freedom Foundation
12. Public Utilities Commission of Ohio (PUC of Ohio)
13. RCN Telecom Services, Inc (RCN)
14. Tricom USA, Inc. (Tricom)
BELL ATLANTIC/GTE
January 27, 2000 SUPPLEMENTAL FILING
Petitions/Comments on Internet Backbone Proposal (filed February 15, 2000):
1. Arvanitas, Peggy
2. Association For Local Telecommunications Services (ALTS)
3. AT&T
4. Communications Workers of America (CWA)
5. Competitive Telecommunications Associations (Comptel)
6. Covad Communications Company (Covad)
7. Lowenhaupt, Thomas, Vice Chair, Community Board 3Q
8. NEXTLINK Communications, Inc. (NEXTLINK)
9. Progress & Freedom Foundation
10. Telecommunications Resellers Association (TRA)
Oppositions/Reply Comments on Internet Backbone Proposal
(filed February 22, 2000):
1. Bell Atlantic/GTE
2. Cable & Wireless
3. Competition Policy Institute (CPI)
4. Pimmitt Run Research, Inc.
Petitions/Comments on All Other Issues (filed March 1, 2000):
1. Advanced Telecom Group, Inc. (Advanced Telecom)
2. Allegiance Telecom, Inc. (Allegiance)
3. Alliance for Public Technology (APT)
4. American Telemedicine Association
5. AT&T Corp.
6. BlueStar Communications, Inc, DSL.net Inc., KMC Telecom, Inc., and MGC
Communications, Inc. (BlueStar et al.)
7. Commonwealth of Northern Mariana Islands
8. Communications Careers for Latinos
9. Communications Workers of America (CWA)
10. Competitive Telecommunications Association (CompTel)
11. CoreComm, Inc. (CoreComm)
12. Covad Communications Company (COVAD)
13. Focal Communications (FOCAL)
14. Indiana Utility Regulatory Commission (IURC)
15. Labor Council For Latino American Advancement (LCLAA)
16. MCI WorldCom
17. National ALEC Association/Prepaid Communications Association
(National ALEC)
18. National Puerto Rican Coalition, The Cuban American National Council, MANA, The
American G.I. Forum, The Hispanic Association of Colleges and Universities, ASPIRA
Association, The League of United Latin American Citizens, and The National
Association of Hispanic Publications (National Puerto Rican Coalition et al.)
19. NorthPoint Communications, Inc. (NorthPoint)
20. Office of Consumer Advocate, Pennsylvania
21. RCN Telecom Services (RCN)
22. Texas Office of Public Utility Counsel (Texas OPC)
23. United States Hispanic Chamber of Commerce
24. World Institute on Disability
25. Z-Tel Communications (Z-Tel)
Oppositions/Reply Comments on All Other Issues (filed March 16, 2000):
1. Bell Atlantic/GTE
2. NEXTLINK Communications, Inc. (NEXTLINK)
3. Telecommunications Advocacy Project (TAP)
Comments on Applicant's Further Submissions (filed May 5, 2000):
1. Allegiance Telecom, Inc., Bluestar Communications, Inc., CoreComm, Inc., DSLNET,
Inc.,MGC Communications, Inc., d/b/a MPower Communications Corporation
2. Association For Local Telephone Services (ALTS)
3. AT&T
4. Cavalier Telephone, LLC. (Cavalier)
5. Competition Policy Institute (CPI)
6. COVAD Communications Company (COVAD)
7. Fred Goldstein
8. Information Technology Association of America (ITAA)
9. NorthPoint Communications (NorthPoint)
10. SCC Communications Corp. (SCC)
11. WorldCom
Reply Comments on Applicant's Further Submissions (filed May 9, 2000):
1. Alexis Rosen
2. BA/GTE (correction, filed May 10, 2000)
Appendix B
Genuity Conditions
APPENDIX B
Conditions for Establishment of Genuity as a Separate
Corporation
3. Bell Atlantic and GTE must implement the spin-off of Genuity to a
separate public corporation in accordance with the following structure:
IV. IPO of Genuity
5. Genuity's existing nationwide data business will be established as a
separate corporation that will be publicly owned and controlled. Before merging with Bell
Atlantic, GTE will exchange its common stock of Genuity for shares of a new class of
common stock, the Class B common stock, and Genuity will sell 90.5% of its equity to
public shareholders through an initial public offering ("IPO"). Following these
transactions, the Class B stock will carry 9.5% of the voting rights and the right to receive
9.5% of any dividends or other distributions in Genuity, subject to the conversion rights
and investor safeguards described below, and Genuity's Class A common stock, initially
representing 90.5% of the equity in the company, will be owned by the public. The
merger of Bell Atlantic and GTE (creating "NewCo") will not close until the IPO is
completed.
VI. Conversion Rights
7. The extent of NewCo's rights to convert its Class B stock into a
greater equity interest is as described below. NewCo will have five years from the closing
of the merger (subject to any extension specifically contained herein or granted by the
Commission at its discretion as specified in Section 2.D below) to satisfy the conditions
associated with its conversion rights and to exercise those conversion rights.
A. No Conversion Right Above 10% Equity Interest If Threshold Not
Met
8. Unless and until NewCo eliminates, as to at least 50% of Bell
Atlantic in-region lines, section 271 restrictions applicable to its operation of Genuity's
business, NewCo will only have the right to convert its Class B stock into Class A stock
representing a 10% equity interest in Genuity. Accordingly, if NewCo fails to meet the
50% threshold within the conversion period, NewCo will never have any right to convert
its stock into more than a 10% interest, and the public shareholders' ownership of at least
90% of the company will be permanent. Likewise, if NewCo transfers its Class B shares
to a third party before reaching the 50% section 271 threshold, that third party will never
be able to convert those shares into more than a 10% interest in Genuity.
A. Conversion Right Above 10% Equity Interest Once Threshold Is Met
9. Once NewCo has met the 50% section 271 threshold, its Class B
shares become capable of converting into stock that will represent approximately 80% of
the outstanding shares of Genuity following conversion, assuming no additional Class A
shares are issued before conversion. Even after meeting this threshold, however, NewCo
itself cannot exercise its conversion rights so as to own and control Genuity unless and
until NewCo has eliminated all section 271 restrictions applicable to NewCo's operation
of Genuity's business.
10. Once NewCo has eliminated such restrictions as to 95% of Bell
Atlantic in-region lines, NewCo may require Genuity to reconfigure its operations in one
or more Bell Atlantic in-region states where NewCo has not eliminated such restrictions in
order to bring those operations into compliance with section 271 and allow NewCo to
exercise its option and own and operate Genuity, provided that (i) NewCo gives the
Commission at least 90 days advance notice of its intent to exercise its option and submits
to the Chief of the Common Carrier Bureau a plan for the reconfiguration of Genuity's
operations in the relevant state or states, (ii) the reconfiguration of Genuity's operations
does not result in the loss to Genuity of more than 3% of its annual revenue, and
(iii) NewCo reimburses Genuity for the cost of such reconfiguration (as provided for in an
agreement between NewCo and Genuity).
11. NewCo's post-conversion interest will be lower than 80% if
Genuity, as is anticipated, issues additional shares of Class A stock before NewCo
exercises its conversion rights. Upon exercise of its conversion rights, NewCo's Class B
shares shall be converted into the appropriate number of Class C shares. Each share of
Class C stock will be identical to a share of Class A stock except that it will carry five
votes; these enhanced voting rights will likely preserve NewCo's ability to obtain voting
control of Genuity post-conversion in the event Genuity has issued substantial amounts of
new Class A shares. If NewCo transfers its Class B shares to another party, that party
may only convert them into Class A stock.
12. Subject to the limitation on sales proceeds below, NewCo will have
the right at any time after it has met the 50% section 271 threshold to dispose of all or part
of its Class B shares, or to exercise its conversion rights as part of a transaction by which
it immediately disposes of all or part of its interest in Genuity so that its post-conversion
interest in Genuity does not exceed a 10% equity interest. If NewCo seeks to sell all or
part of its interest in the Class B shares after it has met the 50% section 271 threshold (but
before it has eliminated applicable section 271 restrictions as to 95% of Bell Atlantic in-
region lines), it shall offer to sell such shares to Genuity at a price equal to the lesser of the
following: (a) the amount it would be able to retain under section 2(c) below, or (b) the
fair market value of the shares (as determined by a nationally recognized independent
investment banker selected jointly by Genuity and NewCo). The purchase price may be
payable in the form of a marketable debt instrument which will not be subordinate and will
have a fair market value equal to its face value. Such debt instrument shall bear interest at
a commercially reasonable rate, comparable to rates under similar instruments held by
companies with debt ratings comparable to Genuity, with a commercially reasonable time
for repayment. Genuity shall have 90 days after the date it receives such an offer to agree
to purchase NewCo's shares. If Genuity agrees to purchase NewCo's shares within the 90
day period, Genuity shall have 180 days after the date it receives the offer to make any
financial or other arrangements and to complete the purchase. NewCo will grant any
consent necessary under the investor safeguards described below in order to complete
such a sale to Genuity. The Applicants shall make such changes to their S-1 and other
filings as necessary to provide that Genuity's holding of a debt instrument as described in
this paragraph shall be an exception to any limitation on the aggregate amount of debt that
NewCo may hold in Genuity, as otherwise provided in these conditions. If, before
NewCo's conversion period would otherwise expire, NewCo has offered to sell Class B
shares to Genuity, the conversion period will be extended to allow for sale of the Class B
shares to Genuity or to another party.
13. In the event Genuity chooses not to purchase NewCo's shares
within the 90-day period after it receives such an offer (or if Genuity is unable to complete
the purchase), then NewCo will transfer the shares to a disposition trustee selected in
accordance with the Commission's rules for sale to a third party purchaser. Upon
completion of the sale, the disposition trustee will remit to NewCo as soon as reasonably
practicable the proceeds of such a sale subject to the limitation on sales proceeds in
section 2(c). To the extent Class B shares are purchased by someone who is not subject
to applicable section 271 restrictions, that purchaser would be free to convert those Class
B shares immediately into Class A shares.
14. After NewCo has eliminated applicable section 271 restrictions as
to 100% of Bell Atlantic in-region lines and simultaneous with its conversion of the shares
of Class B common stock, NewCo would, at its election, either make a payment to
Genuity for distribution to the holders of Class A common stock or adjust the conversion
ratio, in either event so that the holders of Genuity's Class A common stock receive a
portion of the appreciation on the Class B common stock (and accompanying conversion
rights). That portion would be determined as follows. First, NewCo's total appreciation
would be determined; that would be an amount equal to the value of NewCo's Class B
common stock on an as-converted basis (determined by a nationally recognized
independent investment banker in proportion to the appreciation in the publicly traded
Class A common stock but adjusting that appreciation so that it did not reflect anticipation
of the payment or conversion change contemplated by this paragraph) less the initial value
of NewCo's Class B stock (based on the original IPO price). Second, the appreciation
attributable to a 10% interest in Genuity would be subtracted from NewCo's total
appreciation (since NewCo could have owned that without regard to section 271
restrictions). Third, as of each anniversary of the closing of the IPO, a percentage will be
determined equal to 25 percent times a fraction, the numerator of which is the number
of Bell Atlantic in-region lines as to which applicable section 271 restrictions have not
been eliminated and the denominator of which is the number of Bell Atlantic in-region
lines. Fourth, those annual fractions will be averaged. And fifth, the product of that
average fraction times NewCo's appreciation (less the ten percent subtracted in step two)
will either be paid in cash to Genuity, in which case it will be tax adjusted (to reflect the
fact that NewCo would have to pay taxes if it sold Genuity stock or other assets to raise
the cash), or translated into a number of shares of Genuity stock and forgone by NewCo
in the conversion, in either event giving the appropriate amount of value to the public
shareholders.
A. Limitation on Sales Proceeds
15. If NewCo sells all of its stock before it has eliminated applicable
section 271 restrictions as to 95% of Bell Atlantic in-region lines, NewCo will not have a
right to retain sale proceeds that exceed (i) the value of a 10% equity interest in Genuity
(determined based on the sale proceeds), plus (ii) the amount NewCo would have if it had
taken the amount of its initial investment in Genuity above a 10% interest (based on the
IPO offering price for the Class A shares) and invested it at the time of closing in the S&P
500 Index. If, during such period, NewCo sells all of its stock except an amount
convertible into a 10% equity interest in Genuity, NewCo will have a right to retain only
the amount described in clause (ii) above. In each of these cases, NewCo would pay an
amount equal to sale proceeds in excess of those proceeds it can retain under the
preceding two sentences, adjusted to reflect taxes due on that excess amount, or would
pay such lesser amount as the Commission in its discretion may determine, into the general
fund of the U.S. Treasury. Once NewCo has eliminated applicable section 271 restrictions
as to at least 95% of Bell Atlantic's in-region lines, NewCo may sell its stock and retain
the sales proceeds, except that NewCo (or the purchaser) shall make either the conversion
payment or the conversion adjustment that would be required under the last paragraph of
Section 2.B.
A. Extension of Five-Year Conversion Period
16. If, by the end of five years, NewCo has eliminated applicable
section 271 restrictions as to all but 10% of Bell Atlantic in-region lines (or as to all but
one state, irrespective of the percentage of Bell Atlantic in-region lines accounted for by
that state, plus additional states accounting for up to 5% of Bell Atlantic in-region lines),
NewCo may file a petition with the Commission requesting one additional year in which to
eliminate the remaining restrictions and exercise its conversion rights. The Commission
shall have discretion whether to approve such a petition. If, by the end of the conversion
period, litigation is pending over whether NewCo has eliminated such restrictions as to
certain lines, and if a court determines after the end of the conversion period that NewCo
has eliminated such restrictions as to those lines, then for purposes of these provisions
NewCo shall be deemed to have eliminated those restrictions within the conversion period
and shall be permitted a reasonable time to exercise or dispose of its conversion rights.
17. The Commission shall have discretion to toll or extend the running
of the conversion period to account for intervening events that delay elimination of section
271 restrictions.
18. If, by the end of the conversion period, NewCo has eliminated
applicable section 271 restrictions as to 100% of Bell Atlantic in-region lines, then NewCo
shall be able to exercise its conversion rights at a time determined by Newco (whether
inside or outside the conversion period). Once Bell Atlantic/GTE has eliminated
applicable section 271 restrictions as to 100% of Bell Atlantic in-region lines, it will
comply with section 272 to the same extent that section 272 would apply if Bell
Atlantic/GTE exercised its conversion rights, notwithstanding any delay in actual
conversion of its shares of Class B stock.
A. Compliance with Legal Order
19. If, before NewCo satisfies the 50% section 271 threshold, a court
or agency rules that NewCo's interest in Genuity results in a violation of section 271,
NewCo's Class B shares shall be immediately convertible to the same extent as described
above in section 2.B. In such event, NewCo shall be given a reasonable time extending
beyond the date that such ruling becomes final and non-appealable in which to dispose of
its Class B shares to the extent they are convertible into more than a 10% interest (or to
convert those shares as part of a disposition), and may sell its shares to a third party
subject to the limitation on sales proceeds described above.
XX. Independence of Genuity
21. Until NewCo eliminates the applicable section 271 restrictions and
exercises its option to take ownership of Genuity, Genuity will be independent of NewCo.
Genuity will have an independent board of directors that is periodically elected by the
voting shareholders consistent with the requirements of applicable corporation laws.
Before the IPO, Genuity will elect six directors, including the CEO of Genuity, one
director elected by a class vote of the Class B shares, and four independent directors who
have no prior relationship with GTE or Bell Atlantic. Within 90 days following the IPO,
the four independent directors will select seven additional directors who have no prior
relationship with GTE or Bell Atlantic, which will bring the total board membership to 13
directors, a majority of whom will have been selected after the IPO. In addition, as soon
as practicable, but in any event within nine months following the IPO, all directors except
the Class B director will stand for election by the public shareholders, and each year
thereafter four such directors will stand for election. The Class B director will abstain
from any vote before there are at least ten directors on the board and will at no time serve
as chairman of the board. Exhibit B to the April 28, 2000 ex parte submission of William
P. Barr describes more fully how the board of Genuity will be constituted and elected.
22. The board and officers of Genuity will owe fiduciary duties to the
public shareholders. Incentive compensation for Genuity managers will be tied to the
performance of Genuity and the value of Genuity's publicly traded stock, not to the
financial performance or stock value of NewCo. The initial source of financing for
Genuity will be the proceeds from the IPO of Class A stock. Any additional funding
required by Genuity during the period before NewCo converts its Class B stock would be
raised from the public markets, possibly by issuing additional Class A shares, by issuing
debt to the public, or by arm's-length commercial loans. During such period, if NewCo
were to choose to make loans to Genuity, NewCo could provide no more than 25% of the
aggregate debt financing that Genuity is permitted to incur.
XXIII. Investor Safeguards
24. NewCo's interests as a minority investor and potential future
majority shareholder of Genuity will be protected by certain reasonable investor
safeguards, which are described in Attachment 1 to these Conditions. NewCo's rights
under these safeguards will remain in effect only until NewCo converts its Class B shares
(or until NewCo no longer has a possibility of converting into more than a 10% interest).
These include the right to approve certain fundamental business changes that adversely
impact the value of NewCo's minority investment and conversion rights, including a
change in control of Genuity or the sale of a significant portion of its assets.
25. Genuity's business includes Internet backbone and related IP
services. Genuity does not provide traditional switched voice long-distance service, and
Genuity's business plan does not contemplate the acquisition of a traditional voice long-
distance service provider. NewCo agrees not to consent, pursuant to any applicable
investor safeguard rights, to Genuity's acquisition of a traditional voice long-distance
provider unless the Commission has first reviewed and approved such acquisition.
XXVI. Commercial Contracts Between NewCo and Genuity
27. Consistent with the fact that Genuity and NewCo will each be
independent public corporations whose directors and officers will owe duties of care and
loyalty to their respective shareholders, all commercial interactions between NewCo and
Genuity will be pursuant to commercially reasonable contracts. (See "Commercial
Contracts Between NewCo and DataCo," submitted for the record on April 3, 2000, and
revised agreements submitted on June 9, 2000.)
28. Because a significant portion of Genuity's business will be outside
the Bell Atlantic region or in in-region states where Bell Atlantic has eliminated applicable
interLATA restrictions, NewCo may enter into a marketing agreement with Genuity for
the period before NewCo exercises its conversion rights. (See "Purchase, Resale and
Marketing Agreement," submitted as part of the "Commercial Contracts Between NewCo
and DataCo.") Both GTE and Bell Atlantic are legally free to enter into this kind of
commercial relationship today with a similarly situated company. Pursuant to this
agreement, NewCo will market Genuity's services (or the two companies will market their
services jointly) as and where permitted by law. For example, in New York, where Bell
Atlantic has already received section 271 approval, NewCo and Genuity will jointly
market Genuity's Internet connectivity services. The agreement provides that NewCo will
not provide or jointly market any interLATA Genuity service in any state where NewCo
does not have interLATA authority. The agreement is non-exclusive; either company may
purchase from or sell to others.
29. NewCo and Genuity will also enter into certain additional
commercial contracts, including contracts for transitional administrative support services
to help ensure Genuity's stand-alone viability following the Genuity IPO. These
transitional support contracts will have a term of one year or less and will be terminable at
any time by Genuity without penalty. In addition, these transitional services contracts will
not be renewed by the parties. The list of transitional services, with the timeframe for
each service within which Genuity will transition from NewCo, is attached to these
Conditions as Attachment 2. NewCo will not have any role in hiring or firing Genuity
employees, and Genuity will not rely upon any network monitoring from NewCo after
October 31, 2000.
XXX. Independent Auditor
31. NewCo will hire an independent auditor, acceptable to the Chief of
the Common Carrier Bureau, to monitor NewCo's ongoing compliance with the terms of
these conditions. APPENDIX C: Summary of Confidential Information
[NOT TO BE RELEASED WITH PUBLIC VERSION]
This Appendix summarizes documents produced by the Applicants in connection with
each Applicant's plans to compete in local exchange and exchange access markets outside
its service areas and, in particular, within each other's service areas.
A. Applicants' Plans to Compete Outside Their Traditional Service
Areas
1. GTE's Out of Region Plans
2. Bell Atlantic's Out of Region Plans
SEPARATE STATEMENT OF COMMISSIONER SUSAN NESS
Re: Applications of GTE Corporation, Transferor, and Bell Atlantic
Corporation, Transferee, for Consent to Transfer Control of Domestic and International
Sections 214 and 310 Authorizations and Application to Transfer Control of a Submarine
Cable Landing License (CC Docket No. 98-184)
The Commission today approves the merger of two of the largest incumbent
telephone companies. I believe that on balance the transaction, as finally structured, is
consistent with the public interest. I write separately to underscore the importance that I
place on ensuring that the transaction complies with both the letter and spirit of section
271 of the Communications Act. That provision lies at the very heart of Congress' efforts
to promote competition and deregulation throughout all telecommunications markets.
While this transaction presents a close call, I believe that the modified proposal
that we approve today satisfies the section 271 test. In particular, the merged entity is not
allowed to profit from in-region long distance services prior to achieving section 271
approval. This will give the company the incentive to open its local markets as
expeditiously as possible. Today's decision emphasizes that Bell companies may
participate in the long distance market in their states, but only after they have fulfilled their
statutory market-opening responsibilities.
STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH
CONCURRING IN PART AND DISSENTING IN PART
Re: GTE Corporation and Bell Atlantic Corporation, Application for
Consent to Transfer Control of Domestic and International Sections 214 and
310 Authorizations and Application to Transfer Control of a Submarine
Cable Landing License, Memorandum Opinion and Order, CC Docket No.
98-184.
I concur in the Commission's decision to approve Bell Atlantic's and
GTE's application to transfer control of certain lines and licenses in connection
with the parties' planned merger transaction. I agree that the parties have
demonstrated that they will be in compliance with section 271 of the
Telecommunications Act of 1996 when this transaction is complete and that
Genuity will not be an "affiliate" of the merged company within the meaning of
47 U.S.C. 153(1).
As I have said before, however, I do not endorse the quasi-antitrust
analysis that this Commission has used to determine whether a license transfer is
in the "public interest," and I do not join in those portions of this Order that
follow this approach. Nor do I support those conditions that are essentially
carbon copies of the conditions that the Commission imposed on the
SBC/Ameritech transaction. I summarize below my objections to these
conditions. I refer to the reader to my statement in the SBC/Ameritech Order
for a more complete discussion of my concerns. See Statement of
Commissioner Furchtgott-Roth, Concurring in Part & Dissenting in Part,
Applications of Ameritech Corp., Transferor, and SBC Communications,
Inc., Transferee, For Consent to Transfer Control of Corporations Holding
Commission Licenses and Lines Pursuant to Sections 214 and 310(d) of the
Communications Act and Parts 5, 22, 24, 25, 63, 90, 95, and 101 of the
Commission's Rules, CC Docket 98-141 (rel. Oct. 6, 1999).
First, and most importantly, the Commission's "public interest" interest test
is not grounded in the law. The Commission applies very different levels of
review to license transfer applications that arise under identical statutory
provisions, and it has never articulated a standard for distinguishing among
those applications that receive extensive analysis and those that do not. Nor
does the Commission have established procedures for processing license
transfer applications. And, once it decides to subject a license transfer
application to extensive review, it applies a framework that is so malleable
the Commission can justify any conclusion it wishes. As a result, applicants
lack advance notice regarding the extent to which this Commission will
scrutinize their applications, the process by which their applications will be
handled, and the substantive standard that will be applied should the
Commission closely scrutinize their applications.
Not only is the Commission's free-wheeling approach to its review of
license transfer applications arbitrary and inconsistent with fair notice
requirements, but also it may well be at odds with the constitutional
nondelegation doctrine. The Court of Appeals for the District of Columbia
Circuit has held that where an agency fails to articulate "intelligible principles"
to guide its implementation of a statutory provision, as the Commission has
here, it has effected an unconstitutional delegation of legislative power. See
American Trucking Ass'ns, Inc. v. EPA, 175 F.3d 1027 (D.C. Cir. 1999), cert.
granted sub nom., Browner v. American Trucking Associations, Inc., 120 S.Ct.
2003 (2000).
Second, even assuming the Commission had the authority to impose
conditions on a license transfer application based on the "public interest" test,
the legality of the conditions imposed in this Order is dubious. Indeed, some of
the conditions are directly at odds with specific sections of the statute. For
example, as with the SBC/Ameritech transaction, the parties have agreed to
offer promotions to certain competing local exchange carriers. But many
competing LECs will be unable to obtain these promotional deals, in violation
of section 251(c)(3)'s and 251(c)(4)(B)'s nondiscrimination requirements. In
addition, the carrier-to-carrier promotion condition violates section 251(i)'s
pick-and-choose provision, since some carriers will not be able to access
BA/GTE's facilities on the "same terms and conditions" as other carriers. Cf.
American Tel. and Tel. Co. v. Central Office Tel., Inc., 524 U.S. 214 ("[T]he
policy of non-discriminatory rates is violated when similarly situated customers
pay different rates for the same services. It is that non-discriminatory policy
which lies at the heart of the Communications Act.") (internal quotation marks
omitted).
In addition, the enforcement conditions set forth in this order undermine
the ability of state commissions to administer section 251's market-opening
provisions. Section 252 specifically confers upon state commissions the
authority to oversee negotiation, arbitration, and approval of interconnection
agreements. This Commission takes over this function only when a state
commission fails to act to carry out its section 252 responsibilities. See 47
U.S.C. 252(e)(5). Contrary to this statutory scheme, this order interjects this
Commission into many aspects of the section 252 process.
For these reasons, as well as for those set out in my statement in the
SBC/Ameritech Order, I concur only in the Commission's decision to approve
these license transfer applications and in the analysis it applies to assess
BA/GTE's compliance with section 271 (Part V of this order).
STATEMENT OF COMMISSIONER MICHAEL K. POWELL,
CONCURRING IN PART AND DISSENTING IN PART
Re: Applications of GTE Corp., Transferor, and Bell Atlantic Corporation,
Transferee, for Consent to Transfer Control of Domestic and International
Sections 214 and 310 Authorizations and Application to Transfer Control of a
Submarine Cable Landing License, CC Docket No. 98-184, Memorandum
Opinion and Order
Just over eight months ago, I wrote separately and at length to criticize sharply the
form and content of the Commission's analysis of another merger of major incumbent
local exchange carriers (LECs), namely SBC's acquisition of Ameritech. Among other
shortcomings, this analysis allowed the applicants' "voluntary" conditions to compensate
for largely unrelated alleged public interest harms. Because the majority persists in its
reliance on this faulty analysis in evaluating Bell Atlantic's proposed acquisition of GTE, I
must respectfully dissent from some aspects of this Order and only concur as to other
aspects. Specifically, although I again concur in the conclusion that there are public
harms that might well result from this combination that are not entirely offset by the
applicants' asserted benefits, I am unsatisfied that any one of these harms bears the weight
assigned to it in this Order. Thus, I believe fewer conditions, tailored to address the
specifically identified harms, would have been the correct result.
This Order suffers from the same flawed analytical framework as in the
SBC/Ameritech Order. In that order, I expressed extreme discomfort with a merger
review standard that places harms on one side of a public interest "scale" and then
examines whether those harms are outweighed by beneficial conditions placed on the
opposite side of that scale, regardless whether the compensating conditions actually rectify
the harms. I explained that this approach results in a number of pernicious effects.
Sadly, these effects are not significantly avoided in this Order.
For example, in the SBC/Ameritech Order, I lamented that the majority's faulty
merger review framework would make it easier for regulators to visit identified harms
upon the public in exchange for unrelated benefits. This problem evidences itself again in
this Order. Despite the fact that the majority concludes that the merger will result in
harms they characterize as significant, such as precluded competition, increased
discrimination, and loss of major incumbent LEC benchmarks, the Order allows these
purportedly significant harms to occur largely unmitigated by the proposed conditions.
This leads me to question whether the majority truly believes that the harms are
significant, or whether they believe, as do I, that the described harms are too speculative
and thus may be exaggerated.
My skepticism surrounding the alleged harms of major LEC mergers is
exacerbated in this proceeding because these harms should be, at least according to the
majority's reasoning, more significant in this merger than in the SBC/Ameritech
proceeding. For example, according to the majority's theory, the bigger the merged LEC
is, the more incentive and ability to discriminate it will have. As such, it follows that there
must be greater risk of potential harm associated with this merger than with respect to the
SBC/Ameritech merger, which yielded a smaller merged entity than the one we sanction in
this Order. Similarly, the majority's benchmarking rationale postulates that it will become
increasingly difficult for regulators to find useful major LEC benchmarks as the number of
these LECs declines. It follows, then, that the further consolidation among major LECs
that the Bell Atlantic/GTE merger represents must involve greater risk of harm than that
associated with the previously approved SBC/Ameritech merger. If I were convinced that
the risk of these harms was as significant as the majority's analysis suggests, and that no
conditions could correct them, I would be very hesitant to subject the public to these
harms and would instead disapprove the merger, rather than try to offset it with
commitments that are wholly unrelated to the harms.
Unfortunately, none of the shortcomings I address here or in my previous
statement on these issues will ever be addressed unless the Commission begins to reform
the majority's "balancing approach" to merger review that we apply again here, or
seriously question the aforementioned specious theories of potential harm. At most, these
theories evidence our reluctance to confront directly what appears to be an unstated
distaste for horizontal mergers in this area. Until then, I must, with respect to both the
majority's unworkable analytical framework, and as to their assessment of potential harms,
respectfully dissent from application of this reasoning in our merger review.
SEPARATE STATEMENT OF GLORIA TRISTANI
Re: In re Application of GTE Corp., Transferor, and Bell Atlantic Corporation, Transferee, for
Consent to Transfer Control of Domestic and International Section 214 and 310 Authorizations and
Application to Transfer Control of a Submarine Cable Landing License. CC Docket No. 98-184.
I vote to approve this merger in express reliance on the Parties' commitment to transfer the
Internet and related assets of Genuity to an independently owned corporation in a manner that will not
give Bell Atlantic/GTE either control over, or a prohibited ownership stake in, Genuity. Having
determined that the contingent interest that Bell Atlantic/GTE will retain in Genuity will be consistent
with Section 271 of the Telecommunications Act of 1996, I find the transaction to be in the public interest
only because of the extensive market-opening and other commitments to which Bell Atlantic and GTE
have agreed.
With this merger, two companies Bell Atlantic/GTE and SBC -- will control a staggering 69
percent of the nation's access lines. Bell Atlantic/GTE alone will control nearly forty percent of those
lines, approximately 69 million local exchange access lines. The combined company will have the
incentive and, absent conditions, the ability to deny, degrade, or delay competitive LEC access to a large
number of consumers. Moreover, by reducing the number of major incumbent LECs to four, the merger
will eliminate an independent source of observation and impair regulators' ability to use comparative
practices analyses to facilitate implementation of the Communications Act.
The conditions to which GTE and Bell Atlantic have voluntarily agreed should, however,
substantially mitigate the potential public interest harms of the proposed merger and result in an overall
public benefit. In particular, the conditions related to advanced services should increase residential and
rural broadband deployment. Along with other commitments, a properly-implemented separate affiliate
for the provision of advanced services and provisions for expediting cost proceedings will provide
competitors an increased ability to compete on fair and equitable terms. The commitment that at least
10% of the urban wire centers and 10% of the rural wire centers where Bell Atlantic/GTE provides xDSL
will be low-income wire centers addresses redlining concerns. Finally, I note with approval the
modifications to various conditions, as originally adopted in the context of the SBC/Ameritech merger,
that the Parties crafted in response to concerns raised by commenters.
As with the SBC/Ameritech merger, I could not support the proposed transaction absent
reporting requirements that will ensure the new company's accountability. These requirements will help
the Commission to monitor GTE/Bell Atlantic's performance on critical measures of its market-opening
performance and advanced services deployment. In particular, requiring Bell Atlantic/GTE to report
certain service quality data on a disaggregated, company-specific basis should increase the Commission's
ability to deter and detect any discrimination by the combined company in Genuity's favor. Moreover,
extensive audit requirements related to the combined companies' compliance with our collocation, UNE,
and line sharing rules should prove useful in assessing Bell Atlantic/GTE's adherence to important
procompetitive requirements.
By voting to approve the transaction based on the proffered conditions, I am accepting the
companies' assurances that they will act in good faith to fully implement all their commitments in a
reasonable and timely manner. Only then will the public and competing carriers realize the potential
public interest benefits of this transaction.